Saba Zi Exploration, LP v. Lane Vaughn, Terry Selland and Fort Peck Oil & Gas, L.L.C. , 448 S.W.3d 123 ( 2014 )

Affirmed as Modified and Opinion filed September 16, 2014.
In The
Fourteenth Court of Appeals
NO. 14-13-00325-CV
SABA ZI EXPLORATION, LP, Appellant
V.
LANE VAUGHN, TERRY SELLAND, AND FORT PECK OIL & GAS,
L.L.C., Appellees
On Appeal from the 55th District Court
Harris County, Texas
Trial Court Cause No. 2008-74745B
OPINION
This case turns on the interpretation of a settlement agreement governing the
distribution of funds following the sale of certain mineral leases. After the sale of
the leases, appellant Saba Zi Exploration, L.P., a party to the settlement agreement,
filed an interpleader action regarding the proceeds, and appellees Lane Vaughn,
Terry Selland, and Fort Peck Oil & Gas, L.L.C. (collectively “Vaughn”), also
signatories, filed a counterclaim, alleging that Saba Zi’s proposed distribution
breached the agreement.1 After a trial to the bench, the court ordered Saba Zi to
deposit $562,957 into the registry of the court and assign Vaughn an overriding
royalty interest in the mineral leases of 1.64%.
On appeal, as in the trial court, the parties principally dispute whether the
terms of the settlement agreement permitted certain alleged expenses to be
deducted from the sale proceeds by Saba Zi before distribution to Vaughn and the
conveyance of overriding royalty interests to third parties. In three issues, Saba Zi
contends that (1) the trial court inaccurately interpreted the settlement agreement,
(2) the trial court erroneously placed the burden of proof on Saba Zi to disprove
Vaughn’s allegations, and (3) the evidence is legally and factually insufficient to
support the trial court’s judgment. We modify the trial court’s judgment to change
the amount of the overriding royalty interest assigned to Vaughn from 1.64% to
.82%, and as so modified, we affirm.
I. Background
In the original dispute among these parties and others, Vaughn claimed an
instrumental role in helping Saba Zi obtain mineral leases in the Bakken shale
formation in eastern Montana and a consequent entitlement to an interest in those
leases.2 Saba Zi denied Vaughn had a right to any such interest. The parties
settled their dispute in a Rule 11 agreement signed on August 12, 2010. Under the
terms of this agreement, Vaughn was to receive two types of “economic benefit”
1
The settlement agreement, as well as the trial court’s orders in this case, treated
appellees collectively as “Vaughn.” Because no distinction is made between any of these parties
in this appeal, we will adopt the convention used below and also refer to them collectively as
“Vaughn.”
2
The lawsuit was initiated by Gulf Coast Prospectors, Inc., seeking declaratory judgment
as to Vaughn’s rights in the leases. Vaughn counter-claimed and filed third party claims against
Saba Zi, among others. As will be discussed, all of the original claims were settled, leaving only
the interpleader claims and related counter-claims. The record on appeal does not contain
pleadings filed prior to the interpleader petition.
2
from Saba Zi in exchange for releasing Vaughn’s claims: “41% of any
Distributable Cash (as defined in Article VI of the Saba Zi Exploration Limited
Partnership Agreement) payable to the TBG, Bakken, LLC (‘TBG’)[ 3] from the
sale of the 31,273 acres, . . . and 41% of any Retained Royalty Interest retained or
granted to TBG (as defined in Article VI of Saba Zi Exploration Limited
Partnership Agreement).”4 This agreement was subsequently incorporated in and
attached to a brief mutual release of all claims.
On April 5, 2012, Saba Zi filed an interpleader petition with the trial court.5
In its petition, Saba Zi stated that the mineral leases had been sold and it was ready
to distribute settlement proceeds and the retained overriding royalty interests.6
Saba Zi further offered to deposit into the court’s registry $255,101.10 and convey
an overriding royalty interest of .82% to Vaughn. Saba Zi sought a release and
discharge of all liabilities in the matter as well as attorney’s fees. Vaughn
answered and filed a counterclaim, alleging Saba Zi breached the contract and
seeking an accounting.
The trial court held a one-day bench trial during which only one witness
3
TBG is identified as Saba Zi’s “Founder Partner” in the Limited Partnership Agreement.
Although the settlement agreement expressly states that Vaughn was not to receive any type of
interest in Saba Zi, TBG, or any other entity, the calculation of his economic benefits were
directly tied to what TBG was to receive from the sale of the mineral rights.
4
Under the agreement, Vaughn was also to receive a $50,000 payment from another
party upon signing of the mutual releases. This payment was apparently made and is not at issue
in this appeal.
5
A law firm that had previously represented Vaughn in the matter filed a plea in
intervention seeking a share of Vaughn’s recovery. Vaughn crossclaimed, asserting his
discharge of the law firm was for cause and, therefore, the firm was not entitled to any recovery.
These claims, however, were severed from the interpleader action, which was then rendered final
and appealable.
6
The period of time between the signing of the settlement agreement and the filing of the
interpleader petition was occupied in part by efforts to find a buyer for the mineral rights and to
close the sale. The terms of the sale were reportedly confidential, so we will not discuss the
details in this opinion.
3
testified—Saba Zi’s representative, Brian Burr—and only a few documents were
admitted as exhibits.7 The court and the parties initially discussed which side was
required to put on their case first, with the court ultimately deciding Saba Zi had
the burden. The only disputes presented at trial for the court’s determination were
what expenses Saba Zi was entitled to deduct from the sale proceeds before
distribution and whether Saba Zi could convey overriding royalty interests to third
persons before calculating the interest to be conveyed to Vaughn.
Specifically regarding the expenses, Vaughn challenged Saba Zi’s right to
deduct $600,000 it listed as “capital raise” (essentially repayment of funds from
investors along with a 100% return on those funds) and another $500,000 it
reported as a management fee.8 As to the overriding royalty interests, Saba Zi
asserted that it conveyed a 1% interest each to the Campbell Group and Bob Burr
(Brian Burr’s father) for services it otherwise could not have afforded given its
financial condition. In an order issued after trial, presenting the court’s findings
and holdings, the court rejected Saba Zi’s request to deduct the $600,000 “capital
raise” and permitted it to deduct only $350,000 of the claimed $500,000
7
Although Brian Burr did not testify in detail regarding his relationship to Saba Zi, an
affidavit he previously filed with the trial court identified him as the managing member of the
partnership that acted as Saba Zi’s general partner. He is also listed on the signature page of
Saba Zi’s Limited Partnership Agreement as the president of each of Saba Zi’s other partners,
including TBG.
8
The management fee was actually owed by Saba Zi’s “Investment Limited Partner,”
DCB Capital, LP to its own general partner. Because of the way the settlement agreement
calculated the amount Vaughn was entitled to receive, Saba Zi was permitted to deduct such fees
before determining Vaughn’s distribution. As will be discussed, the $500,000 claim was for
management fees during a particular period of time and does not represent the entirety of
management fees paid by Saba Zi or deducted from the distribution to Vaughn.
As set forth above, the settlement agreement capped historic costs at $4.5 million.
According to a spreadsheet produced by Saba Zi and admitted at trial, this historic cost figure
was in fact reached. The $600,000 “capital raise” and $500,000 management fee were listed on
the spreadsheet as post-settlement costs, in addition to $329,645 in post-settlement costs on
which Vaughn made no objection.
4
management fee. The court further rejected Saba Zi’s request to convey an
overriding royalty interest to the Campbell Group and Bob Burr. Ultimately, the
trial court ordered that Vaughn was entitled to receive $562,957 and an overriding
royalty interest of 1.64% from Saba Zi. The court further granted attorney’s fees
($11,300) and costs to Saba Zi for its interpleader action and discharged it from the
suit. This appeal followed.
II. Burden of Proof
In its second issue, Saba Zi contends that the trial court erred in assigning it
the burden of proof at trial. In its order, the trial court stated “The Court rules that
Saba Zi has the burden of proving that its expenses were in compliance with the
agreements.” Because resolution of this issue may impact our analysis of the
substantive issues, we will consider it first.
According to Saba Zi, the real issues in this case all stem from Vaughn’s
breach-of-contract counterclaim, and thus, Vaughn should have borne the burden.
In response, Vaughn asserts that Saba Zi properly had the burden of proof because
(1) it was the plaintiff in the interpleader action and (2) it possessed peculiar
knowledge regarding the key facts in the case, which principally concerned Saba
Zi’s expenses and accounting therefor. Vaughn additionally argues that even if the
court erred in assigning the burden of proof, any such error was harmless.
We begin by noting that Vaughn’s first suggestion is incorrect. The issues
tried in the bench trial were related to Vaughn’s breach-of-contract counterclaim,
not Saba Zi’s interpleader action. An interpleader plaintiff is entitled to relief if
three elements are met: (1) it is either subject to, or has reasonable grounds to
anticipate, rival claims to the same fund or property 9; (2) it has not unreasonably
9
Saba Zi filed its interpleader action because both Vaughn and his former counsel
claimed interests in the proceeds and retained royalty interests after the leases sold. See supra
5
delayed filing the action in interpleader; and (3) it has unconditionally tendered the
fund into the registry of the court. Olmos v. Pecan Grove Mun. Util. Dist., 857
S.W.2d 734, 741 (Tex. App.—Houston [14th Dist.] 1993, no writ). None of these
issues were tried to the court in the proceeding now on appeal. Instead, the issues
at trial all concerned whether Saba Zi had properly deducted certain expenses from
the amount it offered to place in the court’s registry and properly calculated the
royalty interest to be conveyed: issues raised only in Vaughn’s breach-of-contract
counterclaim. 10 Put simply, Vaughn was seeking affirmative relief for Saba Zi’s
alleged actions. A party who asserts an affirmative claim for relief generally has
the burden of persuading the factfinder as to each element of his cause of action.
See Vance v. My Apartment Steak House of San Antonio, Inc., 677 S.W.2d 480,
482 (Tex. 1984).11
In the second suggestion, Vaughn contends the trial court properly assigned
the burden to Saba Zi because it possessed “peculiar knowledge” of the facts in
dispute. Courts have used this theory to shift the burden on particular issues under
particular circumstances. See, e.g., Raw Hide Oil & Gas, Inc. v. Maxus
Exploration Co., 766 S.W.2d 264, 272 (Tex. App.—Amarillo 1988, writ denied)
n.5.
10
The elements of a breach of contract cause of action are (1) a valid contract; (2)
performance or tendered performance by the plaintiff; (3) breach of the contract by the
defendant; and (4) damages to the plaintiff resulting from that breach. West v. Triple B Servs.,
LLP, 264 S.W.3d 440, 446 (Tex. App.—Houston [14th Dist.] 2008, no pet.).
11
This issue often arises in declaratory judgment cases, where it is firmly established that
the party asserting an affirmative claim bears the burden of proving its allegations. See, e.g.,
Apache Corp. v. Dynegy Midstream Servs., Ltd. Partnership, 214 S.W.3d 554, 564 (Tex. App.—
Houston [14th Dist.] 2006), aff’d in part, rev’d in part on other grounds, 294 S.W.3d 164 (Tex.
2009); Russell v. City of Bryan, 919 S.W.2d 698, 704 (Tex. App.—Houston [14th Dist.] 1996,
writ denied); see also Pace Corp. v. Jackson, 155 Tex. 179, 194, 284 S.W.2d 340, 350 (1995)
(holding that defendant in declaratory judgment action had burden of proof where he sought
relief through breach of contract counterclaim and plaintiff merely sought construction of the
contract).
6
(holding party that completed wells in a manner which created allocation and
ownership problems should bear burden of proof as to those issues because it
possessed “peculiar knowledge” of the facts); Dessommes v. Dessommes, 505
S.W.2d 673, 679-80 (Tex. Civ. App.—Dallas 1974, writ ref’d n.r.e.) (holding
“considerations of fairness, convenience and policy require[d] imposition of the
burden on the former husband to prove what portion of the commingled retirement
fund [wa]s attributable to contributions of his separate property[, as t]he
commingling of funds was the result of his acts rather than” the wife’s). We do not
agree, however, that the circumstances of this case require application of this
theory here.12 The question of whether Saba Zi properly deducted expenses and
calculated Vaughn’s share was not a discrete issue in this case but was at the heart
of Vaughn’s breach-of-contract allegations. Moreover, unlike in Raw Hide,
Dessommes, and similar cases, there is no allegation that Saba Zi did anything to
render proving the propriety or impropriety of the expenses difficult. See Raw
Hide Oil & Gas, 766 S.W.2d at 272 (explaining party completed wells in a manner
which created allocation and ownership problems); Dessommes, 505 S.W.2d at
679-80 (explaining husband comingled retirement funds). Although much of the
information needed to show a breach of contract would have been in Saba Zi’s
possession, there is no allegation that such information would not have been
discoverable through the normal discovery process. See Tex. R. Civ. P. 190.1-
215.6.
Accordingly, we conclude the trial court erred in assigning the burden of
proof to Saba Zi to disprove Vaughn’s breach-of-contract allegations. However,
under Texas Rule of Appellate Procedure 44.1(a), we may not reverse the trial
court’s judgment unless that error probably (1) caused the rendition of an improper
12
We further note that this theory was not discussed below as a reason for shifting the
burden of proof.
7
judgment or (2) prevented Saba Zi from properly presenting the case on appeal.
Tex. R. App. P. 44.1(a); see also Romero v. KPH Consolidation, Inc., 166 S.W.3d
212, 225 (Tex. 2005). In other words, we will not reverse unless harm resulted
from the error. See, e.g., Klentzman v. Brady, No. 01-11-00765-CV, 2013 WL
5655845, at *13 (Tex. App.—Houston [1st Dist.] Oct. 17, 2013, no pet.).
Although Saba Zi states generally that “[f]ew errors are of greater
importance than errors regarding which party bears the burden of proof,” it does
not provide any argument as to how it was harmed by the court’s alleged error
under the circumstances of this case. Trial court error in assigning the burden of
proof can be determined to be harmless under appropriate circumstances.
Compare In re K.K., No. 2-04-269-CV, 2006 WL 133506, at *2 (Tex. App.—Fort
Worth Jan. 19, 2006, no pet.) (mem. op.) (holding trial court’s error in placing
burden of proof on defendant in de novo appeal from associate judge’s ruling was
harmless where defendant did not contend he was prevented from developing all of
the relevant facts and it did not appear that defendant suffered any injury on
account of this error), and Tex. Real Estate Comm’n v. Sandefur, 279 S.W.2d 954,
955 (Tex. Civ. App.—Fort Worth 1955, no writ) (holding court’s possible error in
assigning burden of proof was harmless where appellant did not contend it was
prevented from developing all of the facts and it did not appear that appellant
suffered any injury on account of this error), with FPL Farming Ltd. v. Envtl.
Processing Sys., L.C., 383 S.W.3d 274, 285 (Tex. App.—Beaumont 2012, pet.
granted) (holding error in assigning burden of proof was harmful where the issue in
question was hotly contested and party “used the error to its advantage in final
argument”), and Bargsley v. Pryor Petroleum Corp., 196 S.W.3d 823, 830 (Tex.
App.—Eastland 2006, pet. denied) (holding error in assigning the burden of proof
on critical issue was harmful where “jury easily could have thought that neither
8
side could prove th[e] issue”).
As will be discussed in detail below, resolution of the disputed issues in this
case largely revolves around construction of the settlement agreement between the
parties and sections of Saba Zi’s Limited Partnership Agreement (as incorporated
into the settlement agreement) as well as the trial court’s assessment of the only
witness’s testimony. We will therefore make our determination regarding possible
harm injected by the use of the wrong burden of proof as we discuss each of the
disputed issues. 13
III. Contract Construction and Evidence
In its first issue, Saba Zi contends that the trial court improperly interpreted
the settlement agreement. In its third issue, Saba Zi challenges the legal and
factual sufficiency of the evidence to support the trial court’s judgment.
A. Standards of Review
The construction of an unambiguous written contract is a question of law for
the court. See Matagorda Cnty. Hosp. Dist. v. Burwell, 189 S.W.3d 738, 740 (Tex.
2006). Whether a contract is ambiguous is also a question of law; one that must be
decided by examining the contract as a whole in light of the circumstances present
when the contract was entered. Anglo–Dutch Petroleum Int’l, Inc. v. Greenberg
Peden, P.C., 352 S.W.3d 445, 449–50 (Tex. 2011). When construing a contract,
we must ascertain the true intentions of the parties as expressed in the writing
itself. See Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d
323, 333–34 (Tex. 2011). In identifying the intention of the parties, we examine
and consider the entire writing in an effort to harmonize and give effect to all the
13
As will be shown, we ultimately overrule Saba Zi’s second issue because we cannot
discern any harm resulting from the trial court’s error in assigning Saba Zi the burden of proof in
this case.
9
provisions of the contract so that none will be rendered meaningless. Valence
Operating Co. v. Dorsett, 164 S.W.3d 656, 662 (Tex. 2005). If, after the rules of
construction are applied, the contract can be given a definite or certain legal
meaning, it is unambiguous and we construe it as a matter of law; on the other
hand, an agreement is ambiguous, creating a fact issue on the parties’ intent, if it is
susceptible to more than one reasonable interpretation. See Ashford Partners, Ltd.
v. ECO Res., Inc., 401 S.W.3d 35, 38-39 (Tex. 2012).
We begin our analysis with the contract’s express language. Italian Cowboy
Partners, 341 S.W.3d at 334; see also Coker v. Coker, 650 S.W.2d 391, 393 (Tex.
1983) (“If the written instrument is so worded that it can be given a certain or
definite legal meaning or interpretation, then it is not ambiguous and the court will
construe the contract as a matter of law.”). Contract terms are given their plain,
ordinary, and generally accepted meanings unless the contract itself shows them to
be used in a technical or different sense. Valence Operating Co., 164 S.W.3d at
662.
Where the parties have entered into an unambiguous written contract, the
instrument alone will be deemed to express the intention of the parties because it is
the objective intent, not subjective intent, that controls. Matagorda Cnty. Hosp.
Dist., 189 S.W.3d at 740. An unambiguous contract will be enforced as written,
and parol evidence will not be received for the purpose of creating an ambiguity or
to give the contract a meaning different from that which its language imports.
Anglo–Dutch Petroleum, 352 S.W.3d at 451. The parol evidence rule, however,
does not prohibit consideration of surrounding circumstances that inform rather
than vary from or contradict the contract text, including the commercial or other
context in which the contract was executed. Houston Exploration Co. v.
Wellington Underwriting Agencies, Ltd., 352 S.W.3d 462, 469 (Tex. 2011).
10
When reviewing for legal sufficiency, we consider the evidence in the light
most favorable to the finding and indulge every reasonable inference that supports
the challenged finding. City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005).
We credit favorable evidence if a reasonable factfinder could and disregard
contrary evidence unless a reasonable factfinder could not. Id. at 827. If there is
more than a scintilla of evidence to support the finding, the legal-sufficiency
challenge fails. BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789, 795
(Tex. 2002). In reviewing the factual sufficiency of the evidence, we consider and
weigh all of the evidence and set aside the judgment only if it is so contrary to the
overwhelming weight of the evidence that it is clearly wrong and manifestly
unjust. Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986). The trial court acts as the
factfinder in a bench trial, and it is the sole judge of the credibility of witnesses and
the weight to be given their testimony. E.g., Zagorski v. Zagorski, 118 S.W.3d
309, 318 (Tex. App.—Houston [14th Dist.] 2003, pet. denied).
B. Analysis
As set forth above, the parties contest two cost deductions Saba Zi
requested—for a $500,000 management fee and a $600,000 “capital raise”—as
well as Saba Zi’s conveyance of a 1% retained overriding royalty interest each to
the Campbell Group and Bob Burr. In general, Saba Zi contends that in construing
the agreement, the trial court ignored the plain meaning of the settlement
agreement and instead relied on the argument of Vaughn’s counsel. We will
discuss each disputed item in turn.
1. $500,000 Management Fee
The trial court found that Saba Zi could validly deduct $350,000 of the
management fees claimed after the date of settlement, but that $150,000 of the fees
should be disallowed. The court based this calculation on its interpretation of
11
Brian Burr’s testimony that the management fee was $25,000 a month and that
work to sell and market the mineral leases continued through September 2011.14
The court then determined that the time from the date of settlement (August 2010)
to the date closing work concluded (September 2011) was fourteen months and
multiplied that number by the amount of the appropriate management fee to get the
$350,000 permissible total (14 x $25,000 = $350,000). In making this calculation,
the trial court appears to have concluded that under the terms of the settlement
agreement, post-settlement fees had to be reasonable and necessary in order to be
deducted. Saba Zi disagrees. 15
According to Saba Zi, under a proper interpretation of the settlement
agreement, it was entitled to deduct all management fees, without limitation. The
basis of Saba Zi’s contention rests in the fact that paragraph 2 of the settlement
agreement, establishing the amount Vaughn was to receive from the sale of the
mineral rights, incorporates Article VI of Saba Zi’s Limited Partnership
Agreement. Saba Zi contends that Article VI allows management fees to be
deducted before the amount of cash distributions is calculated and, thus, the
management fees were not subject to the settlement agreement’s “reasonable and
necessary” requirement.
14
The trial court appears to have been somewhat generous with Burr’s testimony. Burr
actually testified in support of a management fee at $250,000 per year, which is $20,833.33 per
month, not $25,000 as stated by the court in its findings. This generosity accrued to Saba Zi’s
benefit, however, and Vaughn does not complain on appeal. See Pat Baker Co. v. Wilson, 971
S.W.2d 447, 450 (Tex. 1998) (explaining that an appellate court cannot reverse a trial court’s
judgment on unassigned error); Bishop v. Miller, 412 S.W.3d 758, 773 n.17 (Tex. App.—
Houston [14th Dist.] 2013, no pet.) (same). Burr also testified, and the trial court found, that
$250,000 was a reasonable and necessary fee, but as will be explained below, the accuracy of
this statement is not vital to the question of whether fees were properly deducted.
15
Saba Zi also argues the management fees were not subject to the agreement’s $4.5
million pre-settlement cap on expenses, but since the $500,000 in disputed fees at trial was
undisputedly incurred post-settlement, this argument is inapposite to the analysis.
12
In relevant part, paragraph 2 states,
Vaughn shall receive 41% of any Distributable Cash (as defined in
Article VI of the Saba Zi Exploration Limited Partnership Agreement)
payable to [TBG] from the sale of the 31,273 acres, after and subject
to all expenses, debts, and indemnity obligations that Saba Zi is
obligated to pay under its partnership agreement to be capped at $4.5
million in historic costs and subject only to further future reasonable
and necessary expenses needed to market and/or sell the leases.16
And, Article VI of Saba Zi’s Limited Partnership Agreement states in
relevant part:
ARTICLE VI
DISTRIBUTIONS
Section 6.1. Distributable Cash. Except as otherwise provided
in Article XIII hereof, and subject to the limitations contained in
Section 6.4 hereof, the General Partner shall determine the amount of
Net Cash Flow, if any, at the end of each Fiscal Quarter. Not later
than the thirtieth (30th) day after the end of each Fiscal Quarter, the
General Partner will cause the Partnership to distribute the Net Cash
Flow to the Partners as follows:
(a) First, to the Investment Limited Partner until the
cumulative amount distributed to the Investment Limited
Partner under this subparagraph 6.1(a) after any withholding
under Section 6.3 of this Agreement is equal to the sum of (i)
the aggregate Capital Contributions by the Investment Limited
Partner; (ii) the amount necessary for the Investment Limited
Partner to maintain a reserve against future expenses which
together with all other reserves for such purposes shall be equal
to $250,000; (iii) the management fees payable by the
Investment Limited Partner to its general partner with
respect to any amounts distributed to the Investment
Limited Partner; and (iv) the amount, if any, of all
distributions to be made by the Investment Limited Partner to
16
As mentioned above, in using the term “Vaughn,” the settlement agreement referred to
the appellees collectively. See supra n.1.
13
its general partner or otherwise that have priority over
distributions by the Investment Limited Partner to the limited
partners of the Investment Limited Partner on a prorate basis.
(b) The balance, if any, to the Partners in accordance
with their Percentage Interest at the time of such distribution.
(Emphasis added.)
Under Saba Zi’s interpretation, the limitations contained in paragraph 2 of
the settlement agreement (including the requirement future expenses be reasonable
and necessary to market or sell the leases) do not apply to the management fees
referenced in Article VI, as they are deducted before the amount of Distributable
Cash is calculated. According to Saba Zi, the paragraph 2 limitations only apply to
expenses taken after the amount of Distributable Cash is calculated.
The Vaughn Parties posit instead, and the trial court appears to have agreed,
that the management fees incurred post-settlement relate to the marketing and
selling of the leases and, as such, they can only be deducted under the settlement
agreement if they are reasonable and necessary. We conclude that the management
fee is an expense to be paid under the partnership agreement rather than the
settlement agreement and, as such, is not bound by the requirements of paragraph
2. 17 However, we do not agree there are no limitations to the amount that may be
claimed as a management fee; nor do we agree that the judge’s order disallowing
$150,000 of the management fees is in error.
Saba Zi contends that there was no evidence at trial that the additional
17
Paragraph 2 mentions “expenses, debts, and indemnity obligations that Saba Zi is
obligated to pay under its partnership agreement,” but Article VI states that the management fee
is an obligation the Investment Limited Partner owed to its general partner and which was to be
included in the calculation of the Investment Limited Partner’s share of Distributable Cash,
which was deducted before TBG’s (and hence Vaughn’s) share was calculated. Thus, the
management fees were not an expense, debt, or indemnity obligation that Saba Zi was itself
required to pay, and the limitations in paragraph 2 do not apply.
14
$150,000 in management fees was not properly deducted for the post-settlement
period. But, as the court explained in its findings, and we set forth above, Burr
testified that the management fee was $250,000 a year and that work continued on
the sale and post-closing matters for approximately fourteen months after
settlement. The evidence therefore supports the trial court’s reducing the
allowable management fees from $500,000 to $350,000.18 Additionally, because
resolution of this issue concerned matter-of-law contract construction, see
Matagorda County Hospital District., 189 S.W.3d at 740, and the only other
evidence (Burr’s testimony) supports the trial court’s finding, the error in assigning
the burden of proof did not cause the rendition of an improper judgment or prevent
Saba Zi from properly presenting the case on appeal. See Romero, 166 S.W.3d at
225.
2. $600,000 Capital Raise
The $600,000 “capital raise” was comprised of the repayment of a $300,000
loan or investment from six “investors” along with an equal amount of interest or
return on the funds. The trial court stated in its findings that Burr provided unclear
testimony whether the loan/investment or the repayment was made before or after
the settlement agreement was executed.19 As the trial court pointed out, if the
expense was pre-settlement, it would be banned by the $4.5 million cap. The trial
court further found that if the expense was post-settlement, it was not allowed
under the settlement agreement, “particularly at usurious and extraordinarily
unreasonable interest rates.” The court concluded, “Borrowing money and paying
18
See supra n.15. It also appears that $250,000 of the $500.000 in deducted management
fees was placed into a reserve for the following year in September 2011; however, as explained
in the text above, Burr testified that all post-closing work had ceased by September 2011.
19
On Saba Zi’s spreadsheet of expenses, the capital raise is listed as a post-settlement
expense.
15
back outrageous returns appears to be more of a way to favor certain investors at
Vaughn’s expense, rather than conducting business under the Rule 11 Agreement
limitations.”
On appeal, Saba Zi’s only complaint regarding the $600,000 is that there
was no evidence to support the trial court’s conclusion that the expense was not
reasonable and necessary. It points to Burr’s testimony that there was no other
way to raise the funds because banks and other sources would not loan Saba Zi any
money due to its financial condition at the time. While the trial court accepted
Burr’s testimony regarding the inability to obtain funding from other sources, the
court did not agree that the expense was “reasonable and necessary in marketing
and/or sale of the leases” as required by paragraph 2 of the settlement agreement
before it could be deducted in calculating the amount due to Vaughn. Indeed, Burr
testified that the $300,000 was spent to pay attorneys in the ongoing litigation.20
Saba Zi offers no explanation as to how payment of these litigation expenses was
reasonable and necessary for marketing or selling the leases. The plain language
of the agreement, requiring expenses be “reasonable and necessary in marketing
and/or sale of the leases,” supports the trial court’s refusal to permit Saba Zi to
deduct the capital raise as an expense from Vaughn’s respective share of the
distribution. Moreover, because resolution of this issue involved matter-of-law
contract construction, and the only other relevant evidence (Burr’s testimony)
20
When asked directly what the $300,000 was spent on, Burr responded, “We spent it on
this litigation.” At another point, he stated that the $300,000 “was all Saba Zi’s litigation
expense.” He further discussed attorney’s fees incurred for litigation of over $350,000. While at
other points he mentioned marketing expenses and legal expenses associated with the sale of the
leases, he did not specifically state that these expenses were paid from the capital raise.
Also of note, Saba Zi’s spreadsheet of expenses shows the $600,000 capital raise as a
post-settlement expense but also shows a separate expense for $152,000 in “Legal Fees,” an
additional $104,175 in “Legal/Professional” expenses, and $35,327 in “Marketing Expenses”
post-settlement. These deductions were not challenged by Vaughn and are not specifically
explained in Burr’s testimony.
16
supports the trial court’s finding, the error in assigning the burden of proof did not
cause the rendition of an improper judgment or prevent Saba Zi from properly
presenting the case on appeal.
3. Overriding Royalty Interest
As explained above, Saba Zi conveyed a 1% overriding royalty interest each
to the Campbell Group and Bob Burr (Brian Burr’s father) for services that it
claimed it otherwise could not have paid for given its financial condition.21 These
conveyances implicate another section of the settlement agreement, paragraph 3,
which provides: “Vaughn shall receive 41% of any Retained Royalty Interest
retained or granted to TBG (as defined in Article VI of Saba Zi Exploration
Limited Partnership Agreement) in the entire 31,273 acres, more or less, that Saba
Zi owns.” Saba Zi argues that paragraph 3’s reference to Article VI enabled Saba
Zi to convey the interests to these entities. Section 6.2 of Article VI states in
relevant part as follows:
[U]pon the sale . . . of any oil and gas or mineral leases . . . in which
the Partnership retains a royalty interest in oil, gas or minerals
produced from such real property (a “Retained Royalty Interests”
[sic]), the General Partner shall cause the Partnership to distribute in
kind and assign . . . up to 3.5% of the aggregate oil, gas and other
minerals produced from the property . . . to brokers, finders, and
other such unrelated third persons as the Partnership has entered
into agreements to assign Retained Royalty Interests.22
21
Regarding the Campbell Group, it is clear from Brian’s testimony that it was originally
to be paid cash for the services it rendered, but Brian, on behalf of Saba Zi, subsequently offered
to give it a royalty interest in lieu of payment because Saba Zi was having difficulty paying the
amount due. Regarding Bob, Brian testified that he brought his father in to assist with selling the
leases after the company lost an expert it had been using for that purpose; Brian further indicated
that Bob was promised an overriding royalty interest from the beginning because Saba Zi could
not otherwise pay him for his services.
22
Section 6.2 reads in full as follows:
Section 6.2. Assignment and Distribution of Retained Royalty Interests.
17
(Emphasis added.)
In its findings, the trial court pointed out that the conveyances were for
services rendered and the parties agreed in paragraph 2 of the settlement agreement
that historic expenses would be capped at $4.5 million and post-settlement
expenses would be allowed only for reasonable and necessary expenses needed to
market or sell the leases. The court further found that the promises to the
Campbell Group and Bob Burr predated the settlement agreement. 23 The court
then concluded that because historic expenses were capped, Saba Zi could not in
effect pay for pre-settlement services with conveyance of an overriding royalty
Except as otherwise provided in Article XIII hereof, upon the sale or other
disposition of any oil and gas or mineral leases or other interest in real property in
which the Partnership retains a royalty interest in oil, gas or minerals produced
from such real property (a “Retained Royalty Interests” [sic]), the General Partner
shall cause the Partnership to distribute in kind and assign to the Partners interests
in such Retained Royalty Interests, as follows:
(a) As to any Retained Royalty Interest in the amount of 12.5% or
less (the “Basic Retained Royalty Interest”):
(i) First, to the Investor Limited Partner, a royalty interest in the
amount of 2.0% of the aggregate oil, gas and other minerals produced
from the property on the same terms and conditions as the Retained
Royalty Interest;
(ii) Next, up to 3.5% of the aggregate oil, gas and other minerals
produced from the property on the same terms and conditions as the
Retained Royalty Interests, to brokers, finders, and other such unrelated
third persons as the Partnership has entered into agreements to assign
Retained Royalty Interests;
(iii) The balance of such Basic Retained Royalty Interest, if any, to the
Founder Limited Partner [TBG].
(b) As to any Retained Royalty Interest in excess of the Basic
Retained Royalty Interest (the “Excess Retained Royalty Interest”), 50%
of such Excess Retained Royalty Interest to the Founder Limited Partner
and 50% of such Excess Retained Royalty Interest to the Investor Limited
Partner.
23
“[T]he testimony offered leads the Court to believe that the promises predated the Rule
11 Agreement.” Burr’s testimony was inconsistent on this matter, and it was for the trial court as
factfinder to resolve those inconsistencies. See Kormanik, 362 S.W.3d at 687.
18
interest. We do not agree with this interpretation.
As set forth above, paragraph 3 of the settlement agreement gave Vaughn
41% of any Retained Royalty Interest that TBG was entitled to receive, as defined
in Article VI. Unlike paragraph 2, dealing with Distributable Cash, paragraph 3
does not contain any additional limitations or requirements. Under Article VI,
Saba Zi was authorized to convey a royalty interest up to 3.5% to “brokers, finders,
and other such unrelated third persons as the Partnership has entered into
agreements to assign Retained Royalty Interests” before calculation of the interest
to be assigned to TBG (and, under the settlement agreement, to Vaughn). The trial
court appears to have accepted that such agreements were made—to convey 1%
each to the Campbell Group and Bob Burr—but determined that the $4.5 million
cap on historic expenses barred the conveyances. The court expressed particular
concern that
[w]ith historic expenses capped, Vaughn would have no reason to
believe that overriding royalty interests would be conveyed, or had
been promised. The expansive interpretation of the partnership
agreement offered by Saba Zi which would allow it to move 2%
overriding royalty interest out of the Vaughn equation for any reason
is too expansive.
The court’s concerns, however, are not a proper basis for ignoring the plain
language of the parties’ agreement. Even if the question of whether Vaughn had a
reason to believe overriding interests had been promised were relevant to the
analysis, Article VI (as incorporated into paragraph 3 of the settlement agreement)
specified that up to a 3.5% interest could be conveyed before calculation of
Vaughn’s share. 24 Additionally, since the trial court found that the promises
occurred prior to execution of the settlement agreement, it is not the case that Saba
24
Vaughn did not plead or prove any type of fraud occurred in relation to the promised
conveyances or the negotiation of the settlement agreement between him and Saba Zi.
19
Zi moved expenses from the historically capped pre-settlement expenses column to
the overriding royalty interest column, as the court feared. Since the promises
occurred prior to execution, they had no impact on the historic cap imposed as of
the date of execution; at that point, the Campbell Group was entitled to a royalty
interest, not payment. 25 Nothing in the settlement agreement or Article VI (as
incorporated into the settlement agreement) expressly restricts Saba Zi from
converting a promise to pay cash for services into an “agreement[] to assign
Retained Royalty Interests.”
The trial court additionally found that the conveyance to Bob Burr was
barred by Article VI’s limitation that royalty interests could only be assigned to
“unrelated third persons.” The question then becomes whether Bob was a related
third person under the terms of the Limited Partnership Agreement. 26 On this
point, Vaughn argues, and the trial court apparently found, that Bob was excluded
from receiving a royalty interest because of his father-son relationship with Brian.
25
As Vaughn points out, Brian testified at one point that he attempted to negotiate the
historic cap higher for the express purpose of paying Saba Zi’s debt to the Campbell Group. But
it is unclear whether the cap was actually increased for this purpose, and regardless, the trial
court found that the conveyance was promised to Saba Zi prior to execution of the settlement
agreement.
26
The Limited Partnership Agreement does not define the phrase “unrelated third
persons.” While it does define “Person,” the Definitions section of the agreement states that the
definitions apply for “certain terms capitalized and used throughout this agreement.” (Emphasis
added.) The term “persons” is not capitalized in Article VI, so it is not entirely clear that the
provided definition applies to that usage.
“Person” is defined in the agreement as “Any individual, company, partner, [sic]
(whether general or limited), limited liability company, corporation, trust, estate, association,
nominee or other entity.” Even though this precise definition may not apply in Article VI, it is
some indication the drafters would not have limited their definition to living persons as opposed
to business entities as persons. See generally Rosen v. Matthews Const. Co., 777 S.W.2d 434,
435-36 (Tex. App.—Houston [14th Dist.] 1989) (noting generally that corporations qualify under
the law as persons for some purposes but not for others), rev’d on other grounds, 796 S.W.2d
692 (Tex. 1990).
20
But Brian is not a party to the Limited Partnership Agreement. 27 There is no
indication in the Limited Partnership Agreement that the phrase “unrelated third
persons” was intended to restrict someone who was not related to the partnership
itself or one of the partners, as opposed to a mere representative of the partnership.
In the absence of any such indication, we interpret the phrase as only prohibiting
royalty interest conveyances to “persons” related to the partnership or one of the
partners. There is no argument, suggestion, or evidence that Bob had any interest
in or relationship with Saba Zi, or any of the entities that were partners in Saba Zi,
other than providing services in exchange for a royalty interest. 28 The trial court
erred in holding that the conveyances to the Campbell Group and Bob Burr were
disallowed.29 Consequently, we modify the trial court’s judgment to change the
amount of the overriding royalty interest assigned to Vaughn from 1.64% to .82 %.
IV. Conclusion
We overrule Saba Zi’s first and third issues to the degree Saba Zi complains
about the disallowance of deductions for $150,000 in management fees and the
$600,000 capital raise; however, we sustain these issues to the extent that Saba Zi
complains regarding disallowance of the 1% conveyance each to the Campbell
Group and Bob Burr. Because we cannot discern any harm resulting from the trial
court’s error in assigning Saba Zi the burden of proof in this case, we overrule
27
As explained above, see supra n.7, the trial transcript does not contain a detailed
description of Brian’s role for Sabi Zi, but he identified himself in an affidavit filed below as the
“managing member” of Saba Zi’s general partner and he is listed in the Limited Partnership
Agreement as the president of each of Saba Zi’s other partners. Regardless, although he signed
the agreement as president of Saba Zi, as president of TBG, and as president of DCB, Brian is
not a party to the Limited Partnership Agreement or otherwise identified therein as someone to
whom third-persons could not be related in order to receive a royalty interest under Article VI.
28
Brian testified that Bob’s services were instrumental in getting the leases sold.
29
Because we are reversing on this issue in Saba Zi’s favor, we need not consider
whether the error in assigning the burden of proof to Saba Zi on this issue caused any harm.
21
Saba Zi’s second issue.
We modify the trial court’s judgment to change the amount of the overriding
royalty interest assigned to Vaughn from 1.64% to .82 %, and as so modified, the
judgment is affirmed.
/s/ Martha Hill Jamison
Justice
Panel consists of Chief Justice Frost and Justices Jamison and Wise.
22