Indian Oil Company, LLC and William E. Trotter, II v. Bishop Petroleum, Inc. , 406 S.W.3d 644 ( 2013 )

Reversed and Remanded and Opinion filed April 25, 2013.
In The
Fourteenth Court of Appeals
NO. 14-11-00908-CV
INDIAN OIL COMPANY, LLC AND WILLIAM E. TROTTER, II,
Appellants
V.
BISHOP PETROLEUM INC., Appellee
On Appeal from 164th District Court
Harris County, Texas
Trial Court Cause No. 2009-34720
OPINION
William E. Trotter, II appeals a judgment in favor of Bishop Petroleum Inc.
in this contract dispute.1 We reverse and remand.
1
Appellant Indian Oil Company, LLC moved to dismiss its appeal in this case on
December 12, 2012, and asked this court to dismiss it as a party. The motion was carried with
the case. We grant Indian Oil Company’s motion and dismiss it as a party in this appeal.
Background
Robert Harry Bishop owns and operates Bishop Petroleum, which has been
engaged in the oil and gas business since 1976. Bishop Petroleum started
exploring and producing oil and gas in Escambia County, Alabama in 1981.
Because the formation in Escambia County contains lethal hydrogen sulfide, any
operations in this formation require special care and compliance with numerous
Alabama state regulations.
In 1992, Bishop Petroleum was the operator and a working interest owner
under a joint operating agreement pertaining to a deep oil well called Scott Paper
27-1 in Escambia County. The governing document is an A.A.P.L. Form 610 –
1989 Model Form Operating Agreement. The well was drilled and continuously
produced approximately 1.6 million barrels of oil and six billion cubic feet of gas
from 1993 until 2007.
Trotter was a party to the joint operating agreement and one of several non-
operator working interest owners. Trotter assigned his 8.5 percent working interest
in the well in January 2002 to a company he founded called Indian Oil Company,
LLC. Indian Oil informed Bishop Petroleum of Trotter’s assignment by letter on
July 15, 2002; thereafter, Bishop Petroleum distributed revenues and billed
expenses to Indian Oil.
When the well ceased producing in February 2007, Harry Bishop met to
discuss the problem with Bishop Petroleum’s longtime consulting petroleum
engineer Darnell Knippa. Knippa sent a Bishop Petroleum-approved
memorandum to the working interest owners on March 12, 2007, in which he
proposed a workover to clean out the well’s tubing and casing; he attached an
authority for expenditure, which the working interest owners approved. The
March 2007 workover did not restore production. Subsequent gamma-ray tests
2
indicated anomalies and caused Knippa to suspect the presence of holes in the
well’s casing.
Knippa sent a Bishop Petroleum-approved memorandum to the working
interest owners on April 30, 2007, in which he explained his proposed well
workover operations and submitted an authority for expenditure (the “April AFE”)
in the amount of $1,116,600. The April AFE proposed to “run a caliper survey in
the production tubing, utilize a workover rig to pull the production tubing, repair a
leak in the casing and to replace the production tubing.” It also proposed to
conduct fishing operations to retrieve tubing, and to install lift mandrels for future
artificial lift. Knippa’s objective in proposing the workover in the April AFE
included removing the tubing; pressure testing the casing and repairing any holes
that were found; installing new tubing; and performing certain operations to
address issues he anticipated would arise in the future.
Trotter, in his capacity as managing member of Indian Oil, and most of the
other working interest owners consented to the April AFE. Three working interest
owners holding 14.5% of the working interest in the well did not consent to the
April AFE. Bishop Petroleum sent a letter to the consenting working interest
owners on June 19, 2007, asking if they wished to take over the “proportionate
share of the 14.5% interest that is non-consent.” Bishop Petroleum and Trotter
elected to participate and thereby increased their respective interests in the well.
Trotter signed the election: “William E. Trotter.”
The April AFE expired under the joint operating agreement before any
proposed operations were started because Bishop Petroleum could not find a
suitable workover rig for the well. Knippa and Harry Bishop then discussed
proposing a scaled-down workover. Knippa sent a Bishop Petroleum-approved
memorandum to the working interest owners on July 23, 2007, in which he
3
explained his proposed workover operations and submitted an authority for
expenditure (the “July AFE”) in the amount of $589,800. The July AFE proposed
to pull out free production tubing and replace it with new production tubing “in
order to return the well to production.” Knippa did not propose fishing for tubing
because he wanted to cut only free tubing. He proposed pressure testing the casing
integrity to determine if a hole or leak was present; cleaning out the well; and
getting the well back on production before suggesting additional work.
Trotter, in his capacity as managing member of Indian Oil, and other
working interest owners consented to the July AFE in August 2007. Workover
operations started on October 1, 2007. A free point indicator tool got stuck in the
well on the second day; fishing operations to retrieve the tool lasted about 18 days.
Coil tubing operations expected to take two days lasted 31 days. Bishop Petroleum
pressure tested the casing for holes. According to Knippa, the pressure tests did
not reveal a hole in the casing. Bishop Petroleum abandoned the workover efforts
in January 2008 after the well’s production zone could not be reached. Bishop
Petroleum decided not to plug the well at the time because it hoped the well would
clean itself and increase production over time. Bishop Petroleum spent
approximately $1.6 million on the workover.
When the well did not increase productivity, Knippa proposed to plug and
abandon the well; he submitted an authority for expenditure to the working interest
owners on January 27, 2009, in the amount of $243,300 for the cost of plugging
and abandonment. A hole in the casing was discovered when the well was plugged
in June 2009.
Bishop Petroleum asked the working interest owners to pay their share for
the cost of the workover, and for the cost for plugging and abandonment the well.
Bishop Petroleum later sent a demand letter to the working interest owners who
4
had not made payments, requesting payment for “indebtedness incurred under the
operating agreement.” Most of the working interest owners made payments;
Trotter and Indian Oil, among others, did not pay.
Bishop Petroleum sued Indian Oil and four other working interest owners on
June 2, 2009, for breach of contract, quantum meruit, and unjust enrichment.
Bishop Petroleum alleged that the defendants refused to pay their proportionate
share of expenses resulting from the reworking operations and plugging and
abandoning the well; it later added Trotter individually as a defendant in the suit.
The defendants filed a counterclaim for breach of contract, among other
claims, on June 24, 2010. The defendants alleged, among other things, that Bishop
Petroleum breached the joint operating agreement by (1) failing to report a casing
hole to the Alabama Oil and Gas Board and failing to submit a repair proposal; (2)
proposing the July AFE when the well had tubing and casing holes and was close
to being depleted; (3) hiding necessary fishing operations; and (4) failing to inform
the defendants of the workover progress and costs.
A jury trial was held from May 9 to May 17, 2011. As pertinent to this case,
the jury (1) answered “No” to a question asking whether Bishop Petroleum failed
to comply with the Joint Operating Agreement; (2) found that Trotter individually
and four other defendants had an obligation to pay Bishop Petroleum a “prorated
share of expenses per the Joint Operating Agreement,” and that his obligation to
perform was not excused; and (3) awarded damages in the amount of $336,393.42
to compensate Bishop Petroleum for Trotter’s breach of the joint operating
agreement. The jury charge did not submit any questions as to Indian Oil.
Trotter filed a motion for judgment notwithstanding the verdict on June 27,
2011; the trial court did not rule on the motion. The trial court signed a judgment
on July 15, 2011, which ordered that (1) Trotter pay Bishop Petroleum
5
$336,393.42 in damages, $79,176.67 in attorneys’ fees, and $32,673.09 for
litigation expenses; and (2) Trotter take nothing on his counterclaims against
Bishop Petroleum. Trotter filed a motion for new trial on August 11, 2011; the
trial court did not rule on the motion. Trotter filed a timely notice of appeal on
October 13, 2011.
Analysis
I. Legality
In his first issue, Trotter contends that the trial court should have rendered a
take-nothing judgment in his favor because “an agreement that cannot be legally
performed is void, and the July AFE workover could not have been legally
performed.” Trotter contends that Bishop Petroleum’s July AFE was void and
violated public policy because the proposed work could not have been performed
without violating Alabama law. According to Trotter, Alabama Oil and Gas Board
rules and regulations prevent a party from producing a well that has a hole in the
casing. Trotter argues the workover could not have been legally performed
because the July AFE proposed a workover on a well that had a hole in the casing
without also proposing a plan to repair the hole.
A contract to do an act which cannot be performed without violation of the
law violates public policy and is void. Denson v. Dallas Cnty. Credit Union, 262
S.W.3d 846, 852 (Tex. App.—Dallas 2008, no pet.); In re Kasschau, 11 S.W.3d
305, 312 (Tex. App.—Houston [14th Dist.]1999, no pet.). The purpose behind this
rule is not to protect or punish either party to the contract, but to benefit and protect
the public. Denson, 262 S.W.3d at 852; Kasschau, 11 S.W.3d at 312. A contract
that could have been performed in a legal manner will not be declared void
because it may have been performed in an illegal manner; in examining an
agreement to determine if it is contrary to public policy, the court must look for a
6
tendency to be injurious to the public good. Tex. A & M Univ.-Kingsville v.
Lawson, 127 S.W.3d 866, 873 (Tex. App.—Austin 2004, pet. denied).
It is debatable whether Trotter preserved this argument below. He did not
argue in the trial court that the July AFE was void or that it violated public policy.
In his motion for judgment notwithstanding the verdict and his motion for new
trial, Trotter argued that (1) a well cannot be legally produced with a hole in the
casing under Alabama law; and (2) a hole in the casing “must be reported to the
Alabama Oil and Gas Board, which was not done,” and this “failure to report is a
breach of the Operating Agreement as a matter of law.”
In any event, this argument fails on the merits even if Trotter’s post trial
motions are construed generously to argue (as he does on appeal) that the evidence
conclusively establishes illegality as a matter of law. We reject this contention
because Trotter improperly assumes there was a hole in the casing at the time of
the July AFE. This assumption is improper because the evidence in that regard
was disputed at trial.
Trotter points to memoranda accompanying the April and July AFEs, which
state that operations in April 2007 “determined that there is a hole in the tubing and
the casing.” He also points to the schematic diagrams submitted with the April and
July AFEs, which indicated “a possible hole in casing.” Trotter states that his
expert witness, Wayman Gore, testified that he believed a hole in the casing was
found during the March workover. Trotter in particular points to the following
exchanges between his attorney and Alabama Oil and Gas Board operations
supervisor Ralph Hellmich:
Q: Now, can you tell me what an operator is required to do when they
discover the potential or possibility of a casing leak or a hole in the
casing?
7
A: One of the primary safety issues with the State of Alabama is
casing integrity. It’s basically a given. If you look at our rules and
regulations, it refers back to casing integrity, and anytime a well has
lack of casing integrity, we ask the operator to remedy that situation.
* * *
Q: But if, in fact, the well had had a hole in the casing, under your
rules, they were not allowed to produce that well without fixing the
hole?
A: This procedure would probably not have been approved. We
would’ve asked them to address the casing leak.
* * *
Q: Let me back up. In March of 2007, if a casing — if a potential
casing leak was discovered, Bishop was required to devise a plan to
determine whether there really was a casing leak, and if — if there
was a casing leak, to notify your office and not attempt to produce the
well until the casing leak was repaired?
A: If we would’ve been aware that there was a casing leak, we
would’ve required corrective action, and they would’ve had to submit
something to us to fix that.
Q: All right. And if you were aware that there was a possible casing
leak —
A: Yes.
Q: — you would require them to determine whether it existed or not
prior to doing any —
A: Yes. [2]
Hellmich’s testimony establishes that (1) if there is a hole in the casing, then an
operator must repair the hole; and (2) if the Alabama Oil and Gas Board is aware
of a possible hole in the casing, then the Board requires an operator to determine
whether a casing hole exists. Neither the above-cited testimony nor any other trial
testimony by Hellmich conclusively establishes that there was in fact a casing hole
2
The terms “leak” and “hole” are used synonymously by the parties in this case. The
parties refer interchangeably to a “casing leak” and “hole in the casing.”
8
at the time of the proposed workover operations under the July AFE.
The evidence at trial was contested regarding the existence of a hole in the
casing at the time of the July AFE. Gore testified that he believed a hole had been
discovered after the March workover, and the memoranda attached to the April and
July AFEs stated that a casing hole had been discovered. But Harry Bishop and
Knippa testified that they had not confirmed the presence of a hole at the time of
the proposed April and July AFEs.
Harry Bishop testified that he and Knippa suspected a hole in the casing in
the spring of 2007 based on a gamma-ray neutron log that showed anomalies. He
testified that Bishop Petroleum performed several procedures in spring 2007 to
determine whether there was a hole but could not do so without undertaking
additional work. Harry Bishop stated that Bishop Petroleum put new tubing in the
well and then pressure-tested the casing in October or November 2007; these
pressure tests indicated that there was no hole in the casing.
Knippa testified that he suspected a hole in the tubing and casing because
gamma-ray tests conducted in mid-April 2007 indicated anomalies on the log.
Knippa testified that under the July AFE he proposed changing the free tubing in
the well and then pressure testing the casing to confirm if there was a hole in the
casing. He testified that he could not pressure test the casing with holes in the
tubing. Knippa stated he was able to prove that there was no hole in the casing
after pressure testing the casing on two separate days.
Knippa acknowledged writing in the April and July AFEs that a hole existed
in the casing, but he testified that he should not have made the statement because
he only suspected a hole in the casing and could never “prove it.” Knippa also
testified that if a hole in the casing had been found, he would have reported it to
the Oil and Gas Board and asked the Board how to proceed. Hellmich agreed that
9
“if Bishop Petroleum merely suspects a potential hole in the casing, then there’s no
reason to stop attempting to get a well to . . . produce.”
Based on the record before us, the evidence is disputed as to whether there
was a hole in the casing at the time of the proposed July AFE. Trotter improperly
assumes that there was a hole in the casing that required a proposal for casing
repair. We therefore reject Trotter’s argument that, as a matter of law, the
workover proposed in the July AFE could not have been legally performed because
there was a hole in the casing and the AFE did not provide for a plan to repair the
hole.
Accordingly, we overrule Trotter’s first issue.
II. Legal Sufficiency
In his second issue, Trotter contends there is no evidence to support the
jury’s “No” answer to Question No. 3 asking whether Bishop Petroleum failed to
comply with the joint operating agreement. He contends Bishop Petroleum
breached the joint operating agreement as a matter of law in at least three ways.
When conducting a legal sufficiency review, we view the evidence in the
light most favorable to the verdict and indulge every reasonable inference that
would support it. City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005). We
credit evidence favorable to the verdict if reasonable factfinders could and
disregard contrary evidence unless reasonable factfinders could not. Id. at 827.
When an appellant challenges the legal sufficiency of an adverse finding on
an issue for which the appellant had the burden of proof, the appellant must
demonstrate that the evidence conclusively establishes all vital facts in support of
the issue. Dow Chem. Co. v. Francis, 46 S.W.3d 237, 241 (Tex. 2001); TH Invs.,
Inc. v. Kirby Inland Marine, L.P., 218 S.W.3d 173, 189 (Tex. App.—Houston
10
[14th Dist.] 2007, pet. denied). The appellant must show that there is no evidence
to support the factfinder’s finding and that the evidence conclusively establishes
the opposite of the finding. See Dow, 46 S.W.3d at 241 (citing Sterner v.
Marathon Oil Co., 767 S.W.2d 686, 690 (Tex. 1989)); TH Invs., 218 S.W.3d at
189-90. The ultimate test for legal sufficiency is whether the evidence would
enable a reasonable and fair-minded factfinder to reach the verdict under review.
Wilson, 168 S.W.3d at 827.
Here, Trotter concedes he bore the burden under the jury charge to establish
that Bishop Petroleum failed to comply with the joint operating agreement. Thus,
Trotter must establish on appeal that there is no evidence to support the jury’s
“No” answer to Question No. 3 asking if Bishop Petroleum failed to comply with
the joint operating agreement. Trotter cannot do so on this record.
A. Failure to Follow Oil and Gas Board Regulations
Trotter contends that Bishop Petroleum breached the joint operating
agreement’s requirement to follow applicable laws and regulations when it (1)
failed to inform the Alabama Oil and Gas Board that there was a hole in the well’s
casing; and (2) proposed the workover in the July AFE without a plan to repair the
hole. Trotter says Hellmich and Gore agreed that Bishop Petroleum was “required
to report the casing leak to the Oil and Gas Board.” Trotter further contends that
“Bishop [Petroleum] admitted that it did not report the existence of a casing leak to
the Board, and never denied its failure to submit a proposal to the Board to repair
it.” According to Trotter, Bishop Petroleum failed to perform “the appropriate
casing test” and had a duty to report even a suspected hole to the Alabama Oil and
Gas Board.
As discussed above, Trotter improperly assumes there was a hole in the
casing at the time of the July AFE. This assumption is improper because the
11
evidence is disputed as to whether a hole existed. Some evidence supports the
existence of a hole. Gore testified that he believed there was a hole in the casing at
the time of the March 2007 workover. The memoranda accompanying the April
and July AFEs stated that there was a hole in the tubing and the casing. Other
evidence tends to support a contrary conclusion. Harry Bishop and Knippa
testified that they suspected a hole in the casing but could not prove its existence at
the time of the proposed July AFE. Harry Bishop and Knippa also testified that
they conducted pressure testing on the casing during workover operations in
November 2007 and confirmed there was no hole in the casing.
Trotter contends that Bishop Petroleum did not conduct an appropriate
pressure test of the casing in order to establish the absence of a hole in the casing.
He points to Gore’s testimony to support this contention. Based on his review of
the Alabama Oil and Gas Board rules, Gore testified that the standard for testing
casing integrity “is a pressure test of a thousand pounds held for 30 minutes, with
no more than 10 percent of that pressure being leaked off over that 30 minutes.”
Hellmich did not testify regarding the Alabama Oil and Gas Board rules and
requirements for testing casing integrity, and no regulations from this entity were
introduced at trial.
Knippa testified that he decided to pressure test the casing for fifteen
minutes at five hundred pounds because the casing had been in the well for fifteen
years. Knippa further explained as follows:
I picked five — we picked 500 pounds because this casing’s been in
this well for 15 years. When we drill a well, one of the — one of the
things we have to do is we set — say, like, this — this surface casing.
We set that surface casing prior to drilling out — the Railroad
Commission, Alabama Oil and Gas Board, the Mineral Management
Service that takes care of offshore — they require us to pressure test
that casing, and most of the time they require us to pressure test it to a
12
thousand pounds. If you read through the regs with the Oil and Gas
Board, they don’t — as I recall, they don’t tell you — pressure —
pressure test to. They give you some limits, and not to — not to
exceed, as I recall, 1,500 psi. So you — when you’re drilling —
that’s new casing, so you have some confidence in it. But this stuff’s
been in this well now for 15 years, so I don’t want to be pushing and
pressure-testing to — to some point that might actually burst it or
something like that. I want to have pressure integrity, but I don’t want
to be trying to destroy it. So that’s why we used 500 pounds, and
that’s a pretty standard — standard number on — on older stuff like
this.
Taken as a whole, the evidence does not conclusively establish that a hole existed
at the time of the proposed July AFE, or that Bishop Petroleum’s pressure tests in
November 2007 were improper.
Further, Trotter’s contention that Bishop Petroleum was required to inform
the Alabama Oil and Gas Board of a suspected hole in the casing is not supported
by conclusive evidence. At trial, Trotter’s attorney asked Hellmich: “Is there any
regulation that requires an operator to notify the Board of a suspected or a possible
casing leak? In other words, they are permitted to go and try to test it before —.”
Hellmich responded: “Yes. I mean, there is not a particular rule that says ‘You
will notify us immediately.’” Additionally, Hellmich agreed that (1) if an operator
merely suspected a hole, then the Board would not expect the operator to inform
the Board “without further diagnostic procedures;” and (2) if the Oil and Gas
Board was aware of a possible hole in the casing, then the Board would have
required Bishop Petroleum “to determine whether it existed or not.”
This record contains evidence tending to show that the Alabama Oil and Gas
Board did not require Bishop Petroleum to report a suspected hole in the casing
immediately. There is evidence that the Alabama Oil and Gas Board required
Bishop Petroleum to determine if a hole in the casing existed. Here, the evidence
shows that Bishop Petroleum devised a plan and pressure-tested the casing in order
13
to determine if the casing indeed had a hole.
Having reviewed the record, we conclude that Trotter cannot show there is
no evidence to support the jury’s “No” answer to Question No. 3 or that all of the
evidence conclusively establishes that Bishop Petroleum breached the joint
operating agreement’s requirement to follow applicable laws and regulations.
B. Failure to Provide Daily Workover Reports
Trotter argues that Bishop Petroleum breached the joint operating agreement
as a matter of law because it refused to provide daily workover reports to all
working interest owners even though one working interest owner, Claudia
Campbell, specifically requested daily workover reports when she consented to the
July AFE. Trotter argues that Bishop Petroleum was required to provide daily
workover reports to all working interest owners under Article V.D.7(b) of the joint
operating agreement. According to Trotter, Bishop Petroleum’s failure to provide
the reports to all working interest owners constituted a material breach because it
prevented Trotter from proposing to plug the well when the workover costs
became excessive.
Article V.D.7(b) states: “Operator will send to Non-Operators such reports,
test results, and notices regarding the progress of operations on the well as the
Non-Operators shall reasonably request, including, but not limited to, daily drilling
reports, completion reports, and well logs.” Article V.D.7(b) specifically states
that an operator is required to provide reports that non-operators “reasonably
request.” It does not state that an operator is required to send any and all requested
reports; rather, the request must be reasonable. It also does not state that an
operator is required to send reports to all non-operators when one non-operator
requests a report.
14
Trotter never requested any reports; Campbell was the only working interest
owner who requested daily workover reports. Trotter does not point to any
authority or evidence in the record that one working interest owner’s request for
reports obligated Bishop Petroleum to send reports to every working interest
owner, including those who made no such request.
The jury also heard conflicting testimony with regard to whether Bishop
Petroleum was required to provide daily workover reports to working interest
owners. Trotter’s expert, Dorsey Roach, opined that it is “custom and practice in
the industry” to send daily reports of the workover operations to non-operators.
Gore agreed that it is “custom and practice in the oil and gas industry to send a
non-operator daily drilling reports” in a workover like the one conducted under the
July AFE.
However, K. C. Weiner, one of the working interest owners under the joint
operating agreement who consented to the July AFE and paid his share of expenses
for the workover under the July AFE, testified to the contrary. Weiner has
managed minerals exploration and production of oil and gas companies for 30
years, and has reviewed and negotiated hundreds of operating agreements. He
opined that operators do not have to “provide working-interest owners copies of
daily work-over reports.” Weiner also testified that he was familiar with the joint
operating agreement in this case, and that it does not require Bishop Petroleum as
the operator of the well to provide daily workover reports. He further testified that
it is not “standard in the industry” to provide such reports.
Based on the record before us, Trotter cannot establish that there is no
evidence to support the jury’s “No” answer to Question No. 3 asking whether
Bishop Petroleum failed to comply with the joint operating agreement. He cannot
show that the evidence conclusively establishes that Bishop Petroleum breached
15
the joint operating agreement because it did not provide such daily reports to all
working interest owners, including those who had not requested them.
C. Failure to Issue a New AFE
Trotter contends that Bishop breached the joint operating agreement by
failing to issue a new AFE when minor work outlined in the July AFE “became a
major operation requiring ‘fishing’ procedures.” According to Trotter, his
contention is supported by Roach’s uncontradicted testimony.
Roach’s testimony was not uncontradicted. The jury heard conflicting
testimony with regard to whether Bishop Petroleum was required to issue a new
AFE under the joint operating agreement after a free point indicator tool got stuck
in the well and fishing operations were necessary to retrieve the tool.
Roach opined that Bishop Petroleum should have issued a new AFE because
the fishing operation that began on the second day was a “totally different, separate
operation and — from what had been proposed and what had been approved.”
Weiner disagreed with Roach. Weiner opined that a reasonable and prudent
operator would not have “dismissed the work-over rig and gotten a new AFE
approval from the working-interest owners to conduct fishing operations to
remove” a tool that got stuck in the well because “that’s not an unusual
occurrence.” Weiner testified that “[i]t’s part of the considered operations of what
you were doing. I mean, that’s within the realm of things that could go wrong
when you’re doing that kind of an operation. And you don’t know. I mean, you
might get it out in one hour or you might get it out in two or three days, and it just
doesn’t — it’s not anything significantly different than what you’re doing when
you went in there. This is just part of the issues you encounter when you go to
conduct those operations.”
16
Weiner also testified that AFEs do not have “huge contingencies for sticking
tools and fishing” because everybody in the industry understands that “when
you’ve approved an operation, you’ve approved basically everything associated
with it,” and “you don’t plan for every possible contingency because otherwise,
you could never come up with a complete answer.”
Having reviewed the record, we conclude that Trotter cannot show there is
no evidence to support the jury’s “No” answer to Question No. 3 or that all of the
evidence conclusively establishes that Bishop Petroleum breached the joint
operating agreement by failing to issue a new AFE for fishing operations related to
retrieving a tool that got stuck in the well.
Accordingly, we overrule Trotter’s second issue.
III. Damages Award against Trotter
We now turn to Trotter’s third issue, in which he contends that the “portion
of the jury’s verdict attributable to Mr. Trotter’s allegedly unpaid expenses under
the July AFE is wrong as a matter of law” because Trotter did not consent to the
July AFE and cannot be liable for amounts incurred under it.
The jury charge provided as follows:
QUESTION NO. 1
Did any of the following have an obligation to pay Bishop Petroleum
Inc. their prorated share of expenses per the Joint Operating
Agreement?
Answer “Yes” or “No” as to each of the following:
a. Yes William Trotter
* * *
If your answer to Question 1 is “Yes”, then answcr the following
question. Otherwise, do not answer the following question.
QUESTION NO. 2
17
Was the obligation to perform by any of the following excused?
Obligation to perform by Defendants is excused by Plaintiff’s
previous failure to comply with a material obligation of the
same agreement.
Answer “yes” or “no” as to each of the following:
a. No William Trotter
* * *
If your answer to any one named [in] Question 1 is “Yes” and “No” to
anyone in Question 2, then answer the following question. Otherwise,
do not answer the following question.
QUESTION NO. 5
What sum of money, if any, if paid now in cash, would compensate
Bishop Petroleum for the breach of the Joint Operating Agreement, if
any, by the following?
Answer in dollars and cents as to each, if any:
a. $336,393.42 William Trotter
The charge included no answer blank for Indian Oil in the liability or damage
questions submitted in the charge.
Trotter contends that he assigned his interest in the well to Indian Oil in
2002, and that Indian Oil consented to the July AFE in 2007. Trotter therefore
contends that he may be liable for obligations arising under the joint operating
agreement that were incurred before the 2002 assignment, but he is not liable for
work done under the July AFE in 2007 or thereafter.
In that regard, Trotter argues that, “in choosing which parties were
potentially indebted to Bishop [Petroleum] under the JOA, the trial court erred” by
failing to submit a jury question addressing whether Trotter is liable for expenses
under the joint operating agreement after he assigned his working interest in the
well to Indian Oil. Trotter argues that the trial court erroneously refused to submit
his proposed jury question in reliance upon Seagull Energy E & P, Inc. v. Eland
18
Energy, Inc., 207 S.W.3d 342 (Tex. 2006), and incorrectly assumed that he
automatically is liable for all expenses incurred in this case.
Trotter preserved his charge error contention by objecting during the formal
charge conference. Trotter stated: “Defendants object to the omission of a question
on the assignment of Mr. Trotter’s interest to Indian Oil. Proposed question should
read: ‘Is Defendant William E. Trotter, II, liable for any obligation under the joint
— joint operating agreement subsequent to the assignment of his interest, subject
to the J — JOA, to Indian Oil, L.L.C.?’ We feel that the Seagull versus Eland case
is distinguishable on facts and ask that that be — re-urge that that be included as a
question.” In response to Trotter’s objection, the trial court stated: “Okay.
Overruled.”
According to Trotter, Eland does not support “saddling” him with Indian
Oil’s debts incurred under the July AFE. Under Trotter’s reading, Eland stands for
the proposition that a party who assigns its interest in a joint operating agreement
remains liable for ongoing debts “limited to general operating costs—cost[s] that
the original party agreed to accept” under the joint operating agreement unless the
party was expressly or impliedly released from its obligations. Trotter contends
that (1) he “agreed to various costs by signing the JOA;” (2) he “did not agree to
additional costs that required additional consent from individual interest owners;”
and (3) “reworking operations require specific, additional consent” under Article
VI of the joint operating agreement.
Trotter concludes that the trial court submitted “an improper jury charge
both by failing to ask the jury to address the impact of the assignment from Mr.
Trotter to Indian Oil, and by failing to list Indian Oil as a potentially liable party
anywhere in the charge.” Trotter argues that the error led to an improper judgment
requiring rendition of a take-nothing judgment in Trotter’s favor. Alternatively,
19
Trotter argues that this court should reverse the trial court’s judgment and “order a
new trial to determine the damages severally attributable to Indian Oil and Mr.
Trotter.”
In response, Bishop Petroleum asserts that Trotter “seeks to avoid the
express holding” of Eland. Bishop Petroleum asserts that Trotter remains
individually liable for all expenses in this case under Eland because “the operating
agreement did not expressly provide that Trotter’s obligations under the operating
agreement should terminate upon assignment and Bishop Petroleum did not
expressly release Trotter following the assignment of [sic] its working interest” to
Indian Oil.
We conclude that Bishop Petroleum misplaces its reliance on Eland when it
argues that Trotter automatically is liable for all expenses at issue in this case
notwithstanding the 2002 assignment of Trotter’s working interest to Indian Oil.
Eland addressed whether the assignment of an oil and gas working interest
released the assignor from further obligations to the operator under the operating
agreement when the assignee failed to pay its share of operating expenses. Eland,
207 S.W.3d at 344. The operating agreement did not expressly terminate the
assignor’s obligations under the operating agreement upon assignment, and the
assignee did not expressly release the assignor following the assignment of its
working interest. Id. at 346 (“The operating agreement simply does not explain the
consequences of an assignment of a working interest to a third party.”). The
supreme court held that the assignor cannot escape its obligations in these
circumstances merely by assigning its working interest to a third party. See id. at
346-47.
The supreme court emphasized that the operating agreement at issue in
Eland did not specifically address the consequences of assigning a working interest
20
to a third party. See id.; see also Boldrick v. BTA Oil Producers., 222 S.W.3d 672,
677 (Tex. App.—Eastland 2007, no pet.). In other words, the operating agreement
at issue contained no language expressly addressing who was liable following an
assignment of a working interest and the specific expenses, if any, for which
liability existed after assignment. See Eland, 207 S.W.3d at 346-47.
This case involves a different operating agreement and different
circumstances. In Eland, the operating expenses at issue involved abandonment
costs. See id. at 345-46. The expenses at issue here include reworking costs,
which required special consent from the working interest owners under Article VI
of the joint operating agreement.
More importantly, and contrary to the operating agreement at issue in Eland,
the joint operating agreement at issue here is not silent on the key issue. The joint
operating agreement signed by Bishop Petroleum and Trotter contains language
specifically addressing liability after assignment of a working interest to a third
party. Article VIII.D provides: “[N]o assignment or other disposition of interest by
a party shall relieve such party of obligations previously incurred by such party
hereunder with respect to the interest transferred, including without limitation the
obligation of a party to pay all the costs attributable to an operation conducted
hereunder in which such party has agreed to participate prior to making such
assignments.” Under this language, an assignor continues to be liable for
“previously incurred” obligations predating the assignment.
Thus, Trotter is individually liable for obligations incurred before he
assigned his working interest to Indian Oil in 2002 — as contrasted with an
entirely new obligation incurred after the 2002 assignment.
Nothing in this record suggests that the obligation to pay for the workover
under the July AFE is an obligation “previously incurred” by Trotter before the
21
2002 assignment. Trotter assigned his working interest to Indian Oil in January
2002 — at least five years before (1) Bishop Petroleum requested workover
approval; and (2) Indian Oil elected to consent to the workover in August 2007.
Because a working interest owner must specifically consent to reworking a well
under the joint operating agreement, Trotter could not have incurred an obligation
before the 2002 assignment to pay for expenses in 2007 and thereafter under the
July AFE. The July AFE was a new operation presented by Bishop Petroleum and
consented to by Indian Oil more than five years after Trotter’s assignment to
Indian Oil. Therefore, workover expenses under the July AFE cannot be
considered to be an obligation Trotter previously incurred under the joint operating
agreement.
Although we conclude that Trotter is not individually liable for workover
expenses under the July AFE, we nonetheless reject Trotter’s contention that the
trial court abused its discretion by failing to submit his proposed jury question
asking whether Trotter is “liable for any obligation under the . . . joint operating
agreement subsequent to the assignment of his interest . . . .” Trotter
acknowledges on appeal that he is liable for at least some obligations under the
joint operating agreement even after the 2002 assignment to Indian Oil. He
contends that he is not liable for the entire amount awarded against him
individually in the jury verdict and the final judgment.
A trial court has broad discretion in submitting jury questions. Last v. Quail
Valley Country Club, L.P., No. 01-08-00759-CV, 2010 WL 1253782, at *4 (Tex.
App.—Houston [1st Dist.] March 25, 2010, pet. denied) (mem. op.). Thus, we
review any alleged jury charge error for an abuse of discretion. Metro. Transit
Auth. v. Harris Cnty., No. 14-06-00513-CV, 2008 WL 4354503, at *8 (Tex.
App.—Houston [14th Dist.] Aug. 26, 2008, no pet.) (mem. op.). A trial court is
22
required to submit only controlling factual issues which are essential to a right of
action or defense. C & C Partners v. Sun Exploration and Prod. Co., 783 S.W.2d
707, 715-16 (Tex. App.—Dallas 1989, writ denied), disapproved on other grounds
by Formosa Plastics Corp. USA v. Presidio Eng’rs and Contractors, Inc., 960
S.W.2d 41 (Tex. 1998). The trial court does not err by refusing to submit an
immaterial question. See id.
Trotter acknowledged in his brief and during oral argument that,
notwithstanding the assignment, he is liable individually for at least some
obligations arising under the joint operating agreement. There was no fact issue
for the jury to decide with respect to a question framed to ask whether Trotter is
“liable for any obligations under the JOA subsequent to the assignment . . . .”
Based on Trotter’s appellate arguments, the answer to his proposed question
indisputably would have been “Yes.” Because there was no fact issue to be
resolved on the question as framed by Trotter, the question as framed was
immaterial and the trial court properly refused to submit it. Trotter did not tender a
proposed question apportioning damages between Trotter and Indian Oil, and he
did not object to the omission of such a question.
We also reject Trotter’s charge error argument insofar as he posits a fact
issue regarding the existence of an implied release after assignment. See Eland,
207 S.W.3d at 347. This record contains no evidence tending to support the
existence of an implied release.
After Trotter assigned his working interest in the well to Indian Oil in 2002,
Bishop Petroleum distributed revenues and billed expenses to Indian Oil. This
conduct establishes nothing beyond Bishop Petroleum’s acquiescence in Trotter’s
assignment. But mere acquiescence to an assignment is not sufficient to support a
finding of implied release. See Cauble v. Hanson, 249 S.W. 175, 180-81 (Tex.
23
Comm’n App. 1923, judgm’t adopted).
We conclude that the trial court acted within its discretion when it rejected
Trotter’s proposed jury question.
Rejection of Trotter’s charge complaint does not end the analysis regarding
the scope of Trotter’s individual liability after assignment. Trotter additionally
argues that there is no evidence to support the amount awarded against him
individually in response to Question No. 5. He contends that the jury’s award of
$336,393.42 against Trotter in answer to Question No. 5 encompasses amounts
attributable to (1) obligations for which he is liable after the assignment; and (2)
post-assignment workover obligations for which he is not liable based on the
lease’s “previously incurred” language. We agree.
The parties acknowledged during oral argument that the amount awarded
against Trotter individually in response to Question No. 5 covers a range of
expenses. This amount includes expenses for plugging and abandonment;
expenses incurred under various other AFEs submitted between February and July
2007; monthly operating expenses; and workover expenses under the July AFE.
During oral argument, Trotter also acknowledged that he is individually liable even
after the assignment for plugging and abandonment expenses and monthly
operating expenses.3
On the other hand, we have concluded that Trotter is not liable under the
joint operating agreement for workover expenses attributable to the July AFE
because this obligation was not “previously incurred” at the time of the 2002
assignment to Indian Oil.
3
Trotter stated that he continues to be liable after assignment for “general operations” but
not for “new operations” such as the July AFE workover. He stated that he is individually liable
for monthly operating expenses if there is no implied release based upon the assignment.
24
Because the damage award against Trotter encompasses amounts for which
Trotter is liable individually, and additional amounts for which he is not liable
individually, the evidence is insufficient to support the entire amount of damages
awarded by the judgment against Trotter. Bishop Petroleum nonetheless presented
sufficient evidence to support — at a minimum — damages against Trotter
individually for plugging and abandonment expenses and monthly operating
expenses.
Accordingly, although the evidence is legally sufficient to support a finding
of damages in some amount against Trotter individually, it is legally insufficient to
support the entire amount awarded against Trotter individually. See Guevara v.
Ferrer, 247 S.W.3d 662, 669-70 (Tex. 2007); Texarkana Mem’l Hosp., Inc. v.
Murdock, 946 S.W.2d 836, 841 (Tex. 1997). Further, “evidence of unsegregated
damages among claims or parties is more than a scintilla of evidence of segregated
damages.” Minn. Mining & Mfg. Co. v. Nishika, Ltd., 953 S.W.2d 733, 739 (Tex.
1997) (citing Murdock, 946 S.W.2d 836, 841 (Tex. 1997) and Stewart Title Guar.
Co. v. Sterling, 822 S.W.2d 1, 12 (Tex. 1991)).
“[W]hen there is some evidence of damages, but not enough to support the
full amount, it is inappropriate to render judgment.” Akin, Gump, Strauss, Hauer
& Feld, L.L.P. v. Nat’l Dev. and Research Corp., 299 S.W.3d 106, 124 (Tex.
2009); see also ERI Consulting Eng’rs, Inc. v. Swinnea, 318 S.W.3d 867, 877-78,
880 (Tex. 2010); Guevara, 247 S.W.3d at 669-70. In such a situation, we may
remand to the trial court for a remittitur or for a new trial. Akin, Gump, Strauss,
Hauer & Feld, L.L.P., 299 S.W.3d at 124.
Given the state of the evidence in this case, remittitur is not appropriate.
Bishop Petroleum presented an unsegregated lump sum figure backed up by
numerous invoices. Many of the expenses listed are not identified by or linked to
25
specific activities such as plugging and abandonment; various AFEs submitted
between February and July 2007; monthly operating activities; and workover
activities under the July AFE. On this record, there is no way to parse through all
of Bishop Petroleum’s invoices and allocate damages between amounts for which
Trotter admits he is individually liable — such as the plugging and abandonment
expenses — and amounts for which he is not individually liable — such as the
workover expenses incurred under the July AFE.
A remand for a new trial solely on the damages issue is not appropriate in
this case. Texas Rule of Appellate Procedure provides that “[t]he court may not
order a separate trial solely on unliquidated damages if liability is contested.” Tex. R.
App. P. 44.1(b). Trotter has contested liability throughout this litigation. Bishop
Petroleum sought unliquidated damages. Remand of both liability and damages is
mandatory under these circumstances. See id.; Nishika, Ltd., 953 S.W.2d at 740.4
Conclusion
Having overruled Trotter’s first and second issues and sustained Trotter’s
third issue,5 we reverse the trial court’s judgment against Trotter individually and
remand this case for a new trial consistent with this court’s opinion. We do not
4
According to Bishop Petroleum, Trotter complains on appeal that “he is not liable in the
capacity in which he has been sued.” Bishop Petroleum further argues that Trotter’s “answer
does not allege lack of capacity and is not verified.” Trotter responds in his brief that “Trotter is
not arguing that he was sued in the wrong capacity.” In fact, Trotter is not arguing lack of
capacity; instead, he challenges the damage award and its supporting proof. Trotter
acknowledges that he remains liable for obligations he incurred before assignment, and disputes
liability for post-assignment obligations to which he did not consent. Thus, the issue Trotter
presents is not whether Bishop Petroleum can recover against Trotter individually; rather, the
issue is how much it can recover against Trotter individually. For this reason, we reject Bishop
Petroleum’s request to overrule Trotter’s arguments based on the absence of a verified pleading
alleging lack of capacity.
5
In light of our disposition of Trotter’s third issue, we need not address Trotter’s fourth
and fifth issues.
26
disturb the trial court’s take-nothing-judgment as to Indian Oil because (1) the jury
verdict and the trial court judgment do not award damages against Indian Oil; (2)
the judgment denies all relief not expressly granted; (3) Indian Oil abandoned its
appeal; and (4) Bishop Petroleum has not cross-appealed to challenge the trial
court’s take-nothing-judgment as to any claims by Bishop Petroleum against
Indian Oil.
/s/ William J. Boyce
Justice
Panel consists of Justices Boyce and McCally and Senior Justice Mirabal.6
6
Senior Justice Margaret Garner Mirabal sitting by assignment.
27