Paint Rock Operating, LLC v. Chisholm Exploration, Inc., and Chisholm Production, Inc. ( 2011 )

Opinion filed April 14, 2011
In The
Eleventh Court of Appeals
__________
No. 11-09-00353-CV
__________
PAINT ROCK OPERATING, LLC, Appellant
V.
CHISHOLM EXPLORATION, INC. AND CHISHOLM PRODUCTION,
INC., Appellees
On Appeal from the 32nd District Court
Nolan County, Texas
Trial Court Cause No. 18,954
OPINION
This is an accounting dispute. Paint Rock Operating, LLC filed suit against Chisholm
Exploration, Inc. and Chisholm Production, Inc. to collect costs it incurred as operator of four
leases.1 The trial court conducted a bench trial and awarded Paint Rock $3,927.40, but denied
the majority of its requested relief. Paint Rock has appealed, contending that it is entitled to a
larger recovery and to its attorney’s fees. We affirm.
1
The Chisholm entities will be referred to collectively as Chisholm.
I. Background Facts
In 1998, Chisholm, as operator, and Buckingham Oil Interests, Inc., as non-operator,
executed a Joint Operating Agreement (JOA) covering a tract of land commonly referred to by
the parties as the Texaco Fee Lease.2 Chisholm also operated the Brooks, Brooks Ranch, and
Morrow Leases. There was, however, no JOA for these properties. Operations on all four leases
were transferred from Chisholm to Paint Rock in December 2005. Paint Rock sent bills, or JIBs
(Joint Interest Billings), to Chisholm. Paint Rock sent the December 2005 JIBs in June 2006.
The January through May JIBs were sent in early July. The June JIB was sent in mid-July.
Chisholm paid some, but not all, of Paint Rock’s charges. Chisholm returned marked-up copies
of the JIBs, showing the charges that it refused to pay, along with a check for the undisputed
charges. Paint Rock filed suit to collect the unpaid balance of the JIBs as well as its attorney’s
fees.
II. Issues
Paint Rock challenges the judgment with four issues. First, it challenges specific findings
of fact. Second, it contends that the trial court erred by denying it any recovery on its quantum
meruit claim. Finally, Paint Rock argues in Issues Three and Four that the trial court erred by
denying it recovery of its attorney’s fees.
III. Texaco Fee Lease
In Issue One, Paint Rock challenges several of the trial court’s findings of fact regarding
the Texaco Fee Lease, primarily for sufficiency of the evidence. This was the only lease covered
by a JOA, and Paint Rock’s challenges are specific to this agreement.
A. Standard of Review.
A trial court’s findings of fact in a bench trial are reviewed for legal and factual
sufficiency under the same standards used to review a jury’s verdict on jury questions.
Kennon v. McGraw, 281 S.W.3d 648, 650 (Tex. App.—Eastland 2009, no pet.). In considering a
legal sufficiency challenge, we review all the evidence in the light most favorable to the
prevailing party and indulge every inference in its favor. City of Keller v. Wilson, 168 S.W.3d
802, 822 (Tex. 2005). In reviewing a factual sufficiency challenge, we consider all of the
evidence and uphold the finding unless the evidence is too weak to support it or the finding is so
against the overwhelming weight of the evidence as to be manifestly unjust. Pool v. Ford Motor
2
The JOA is an A.A.P.L. Form 610-1982 Agreement.
2
Co., 715 S.W.2d 629, 635 (Tex. 1986). We review the trial court’s conclusions of law de novo.
Smith v. Smith, 22 S.W.3d 140, 143-44 (Tex. App.—Houston [14th Dist.] 2000, no pet.).
B. Did the Trial Court Properly Find that Paint Rock Breached the JOA?
The trial court found that Paint Rock breached the JOA by failing to timely bill Chisholm
for the months of December 2005 through May 2006. Paint Rock alleges that this was error
because Chisholm did not file a pleading alleging breach of contract. There is no question that
Paint Rock breached the JOA by mailing its JIBs late. The JOA includes a standard COPAS
accounting procedure exhibit. Article I.2 provides:
Operator shall bill Non-Operators on or before the last day of each month
for their proportionate share of the Joint Account for the preceding month. Such
bills will be accompanied by statements which identify the authority for
expenditure, lease or facility, and all charges and credits summarized by
appropriate classifications of investment and expense except that items of
Controllable Material and unusual charges and credits shall be separately
identified and fully described in detail.
Darryl Buckingham, Paint Rock’s owner, acknowledged that the JOA required him to submit
monthly bills and that those bills are due by the end of the succeeding month. Consequently, the
bill for December 2005 should have been sent by January 31, 2006. He did not know exactly
when that bill was submitted but agreed that twelve of the fourteen bills he sent Chisholm were
late. Charles Schroeder, III, Chisholm’s president and owner, testified that he received the
December 2005 JIB in June 2006 and that the January through May JIBs were received in July.
It is equally undisputed that Chisholm did not plead breach of contract either as a
counterclaim or affirmative defense. Despite this, there is no question that the issue was tried.
Buckingham was extensively cross-examined about the timeliness of his JIBs, Paint Rock
offered the opinion of its expert that the JOA imposed no penalty for sending out late JIBs, and
Schroeder testified about the date he received each JIB. There was no objection to the propriety
of this evidence.
To determine whether an issue was tried by consent, we examine the record for evidence
of whether the parties actually tried the issue. Johnston v. McKinney Am., Inc., 9 S.W.3d 271,
281 (Tex. App.—Houston [14th Dist.] 1999, pet. denied). Trial by consent is not a general rule
of practice and should not be applied unless clearly warranted. Haas v. Ashford Hollow Cmty.
Improvement Ass’n, Inc., 209 S.W.3d 875, 883-84 (Tex. App.—Houston [14th Dist.] 2006, no
pet.). A party’s unpleaded issue may be deemed tried by consent when evidence on the issue is
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developed under circumstances indicating that both parties understood the issue was in the case,
and the other party failed to make an appropriate complaint. Johnson v. Structured Asset Servs.,
LLC, 148 S.W.3d 711, 719 (Tex. App.—Dallas 2004, no pet.). Because this issue was tried and
because there was no objection to the testimony, the issue was tried by consent and the trial court
did not err by finding that Paint Rock breached the JOA. Issue 1(a) is overruled.
C. Written Exceptions to the JIBs.
Paint Rock next complains of the trial court’s finding that Chisholm properly excepted to
the JIBs. The JOA requires a non-operator to except, in writing, to any challenged charge.
Specifically, Article I.4 provides:
Payment of any such bills shall not prejudice the right of any Non-
Operator to protest or question the correctness thereof; provided, however, all
bills and statements rendered to Non-Operators by Operator during any calendar
year shall conclusively be presumed to be true and correct after twenty-four (24)
months following the end of any such calendar year, unless within the said
twenty-four (24) month period a Non-Operator takes written exception thereto
and makes claim on Operator for adjustment.
When Schroeder received Paint Rock’s invoices, he reviewed them and saw several charges he
disagreed with. Schroeder’s objections were to the increased overhead, the addition of a
production supervisor, and repair work for which there was no prior AFE (Authorization for
Expenditures).3 He marked through or circled the disputed charges, marked down partially
disputed charges, and returned the JIBs and a check for the balance. The marked-up JIBs were
introduced into evidence. Schroeder did not provide any written explanation of his criticisms of
the disputed amounts because he thought it was fairly obvious what his objections were.
When Chisholm operated the leases, it charged overhead at the rate of $400 per month
per well. The JOA allows for an annual adjustment to the overhead rate. Apparently, the rate
had not been changed recently. When Paint Rock took over operations, Buckingham calculated
3
Article VII D.3 of the JOA provides:
Other Operations: Without the consent of all parties, Operator shall not undertake any single project reasonably
estimated to require an expenditure in excess of ten thousand and no/100 Dollars ($10,000.00) except in connection
with a well, the drilling, reworking, deepening, completing, recompleting, or plugging back of which has been
previously authorized by or pursuant to this agreement; provided, however, that, in case of explosion, fire, flood or
other sudden emergency, whether of the same or different nature, Operator may take such steps and incur such
expenses as in its opinion are required to deal with the emergency to safeguard life and property but Operator, as
promptly as possible, shall report the emergency to the other parties. If Operator prepares an authority for
expenditure (AFE) for its own use, Operator shall furnish any Non-Operator so requesting an information copy
thereof for any single project costing in excess of ten thousand and no/100 Dollars ($10,000.00) but less than the
amount first set forth above in this paragraph.
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what overhead would be if it had been adjusted annually, and he started charging this revised
rate. Chisholm refused to pay the new rate but paid $400. Paint Rock also hired a production
supervisor. Schroeder and Buckingham had discussed hiring a production supervisor while
Chisholm was operator. Schroeder told Buckingham that he did not believe a supervisor was
necessary, so Schroeder marked out the supervisor charges. Finally, Paint Rock undertook
several repair operations. Buckingham acknowledged that the JOA required an AFE for
expenditures in excess of $10,000. Even though Paint Rock billed for work that cost more than
$10,000, no AFE was sent. Chisholm marked these repair charges out.
The purpose of the JOA’s written exception provision is to provide the operator with
notice. The JOA, however, does not define what constitutes a sufficient written exception. Paint
Rock knew what charges Chisholm objected to, but Buckingham testified that he believed the
JOA also required an explanation for Chisholm’s objections. Schroeder disagreed because he
believed his objections were obvious. The trial court did not err by finding that Chisholm
properly excepted to the JIBs. If the trial court found Schroeder’s testimony credible, it could
have reasonably concluded that Paint Rock received sufficient notice because it knew what
charges Chisholm objected to and why.4 Issues 1(b) and 1(c) are overruled.
D. The Unpaid Portion of Paint Rock’s JIBs.
Paint Rock next complains that the trial court erred by not awarding it the full amount of
its JIBs. As noted above, the parties’ dispute centers on Paint Rock’s decision to increase
overhead, to hire a production supervisor, and to engage in repair operations without submitting
an AFE. The JOA’s COPAS accounting procedures allow for an annual adjustment as of the
first day of April each year by the percentage increase or decrease in the average weekly
earnings of Crude Petroleum and Gas Production Workers for the last calendar year.
Buckingham recalculated the overhead rate by determining what it would have been if it had
been adjusted every April 1st. This was in error. Paint Rock was entitled to readjust the
overhead rate as of April 1, 2006, but only from the rate currently in effect.
The trial court did not err by finding that Paint Rock violated the JOA by undertaking
repairs in excess of $10,000 without first submitting an AFE. Paint Rock offered testimony that
an AFE was not required, but the JOA clearly provides otherwise. Finally, the trial court could
4
We do not hold that marking out charges on a JIB and returning it to the operator is sufficient, as a matter of law, to
comply with COPAS Article I.4. Our holding is limited to a review of the sufficiency of the evidence to support the trial court’s
finding of fact in this case.
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reasonably find Schroeder’s testimony, that a production supervisor was unnecessary, credible.
If so, Chisholm was not required to pay those charges.
The trial court did not err by finding that Paint Rock was not entitled to the full amount of
its JIBs. Issue 1(d) is overruled.
IV. Other Leases
Paint Rock contends in its second issue that the trial court erred by denying it any relief
for its quantum meruit claim. Schroeder testified that, when Chisholm operated the leases, he
used the same methodology on all four leases, and his criticisms of Paint Rock’s charges made
no distinction between whether they were incurred on the Texaco Fee Lease or on one of the
other leases. Because we have found that the trial court did not err by denying Paint Rock
recovery on the disputed charges incurred on the Texaco Fee Lease, it follows that the trial court
did not err by denying recovery for the same disputed charges on the other leases. Issue Two is
overruled.
V. Attorney’s Fees
Paint Rock complains in Issues Three and Four that the trial court erred by denying it any
recovery for attorney’s fees. When Paint Rock offered attorney’s fee evidence, Chisholm
objected, contending that Paint Rock’s response to its request for disclosure failed to identify the
amount or method of calculating attorney’s fees. The trial court took Chisholm’s objection
under advisement and allowed counsel to testify. The trial court’s findings of fact included a
finding that Paint Rock failed to fully answer Chisholm’s discovery by not disclosing the amount
and method of calculating attorney’s fees. Paint Rock argues that it was not required to disclose
any information concerning its claim for attorney’s fees because TEX. R. CIV. P. 194.2(d)
requires disclosure of economic damages and attorney’s fees are not economic damages. We
need not address this claim because Chisholm acknowledges that an award of attorney’s fees for
a breach of contract or quantum meruit is discretionary. Because the trial court denied Paint
Rock recovery for most of the unpaid items it claimed and because the trial court found that
Paint Rock breached the JOA by not timely submitting JIBs, it did not abuse its discretion by
denying Paint Rock’s claim for attorney’s fees. Issues Three and Four are overruled.
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VI. Conclusion
The judgment of the trial court is affirmed.
RICK STRANGE
JUSTICE
April 14, 2011
Panel consists of: Wright, C.J.,
McCall, J., and Strange, J.
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