Keyes Helium Company v. Regency Gas Services, L.P. , 393 S.W.3d 858 ( 2012 )

AFFIRM; Opinion issued flecember 3, 2012.
In The
Qitiurt tifppea1s
2Eiftl! Hatrirt nf !Yixas at 1a1Izui
No. 05-l0-00929-CV
KEYES HELIUM COMPANY, Appellant
V.
REGENCY GAS SERViCES, L.P. Ilk/a REGENCY GAS SERVICES, L.L.C.. El’ AL.,
A p pcI Ices
On Appeal from the 162nd Judicial District Court
Dallas (‘ountv, Texas
Trial Court Cause No. 08-08738
OPINION
Before Justices O’Neill, Richter, and Myers
Opinion By Justice O’Neill
In this U.C.C. breach of contract case, a jury returned an 11-1 verdict in favor of appellee
Regency Gas Services, L.P., f/k/a Regency Gas Services, LLC. (“Regency”), finding it had not
breached its contract with appellant Keyes Helium Company (“Keyes”). The trial court further
rendered a directed verdict in favor of Regency on Keyes’s unreasonable variation and best efforts
cia i m s.
Keyes raises four issues on appeal. It first argues the jury charge improperly defined “good
faith” under the U.C.C., which caused the jury to reach an incorrect verdict. Second, the trial court
erred by excluding testimony from Keyes’s president regarding reasonable standards of fair dealing.
Iii ird, the trial coUrt erred by directiflt! a verdict ifl favor ol Reecncv on Keyes’s unreasonable
variation claim. And lastly, the trial court erred by directing a verdict in favor of Regency on
Keyes’s best efforts claim. We affirm the trial court’s judgment.
Kackgroaind
The I iugoton l3asin spans several states and is the largest and one of the oldest natural gas
fields in the country. Both Keyes and Regency have operations in the region. Regency owns a
natural gas processing plant in the l-lunoion Field area known as the Lakin Plant, Regency is
considered a “midstream” company in the oil and gas field, meaning it moves and processes natural
gas and associated products like crude helium for its customers. It does not own the products it
transports for its customers but gets paid a fee for moving and processing the product for its clients.
Keyes owns a helium processing plant in Oklahoma that refines crude helium into pure
helium. Keyes acquires the crude helium from midstream companies like Regency. On August 1
1996, Keyes entered into a contract for the sale and purchase of crude helium with Regency that
forms the basis of this lawsuit.
1 The contract provided that from August 1. 1996 through December
3 1 200$, “Seller [Regency] shall sell and Buyer [Keyes] shall purchase all volumes ofCrude Helium
.
produced at the Lakin Plant,” up to 120 millions of cubic feet in any year. After December 31, 2008,
Keyes’s purchase obligation was zero.
In 2003, Regency began receiving complaints about the high costs of processing gas at the
Lakin Plant tI-om its largest customer, Oxy USA, inc. (“Oxy”). The contracts between Oxy and
Regency were expiring in 2003. Regency had reason to believe, based on discussions with Oxy, that
Oxy had better alternatives for processing its gas. Because Oxy accounted for roughly one-third of
I
At the lime of the original contract, Regency was CIG Resources Company.
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the volume of Regency’s system in the Ilugoton Field, losing it would result in a thirty percent loss
in business. Rcencv also recognized that losing ()xv would mean the Lakin Plant would he
dangerously close to “turndown, which is a term referring to the minimum gas volume required to
extract crude helium. i\fter considerine its options, and despite its contract with Keyes. Regency
decided to close the [akin Plant and move its gas processing to a nearby plant owned by its
competitor, Duke Field Services.
Keyes claimed that despite hearing rumors Duke and Regency were building a pipeline to
connect Regency’s system to Duke’s plant, Regency never told Keyes it planned to shut down the
Lakin Plant, Rather, Keyes alleged Regency said it would take care of Keyes and the shutdown was
temporary. However, the reality was that shutting down the Lakin Plant meant shutting off crude
helium that flowed to Keyes. Essentially, Keyes would lose the main source of its crude helium.
Regency shut down the [akin Plant on August 1, 2005.
Keyes sued Regency for breach of’ contract claiming that Regency did not act in good faith,
that it unreasonably varied from the stated estimates in the contract, and that it did not use its best
efforts to supply Keyes with crude helium as required under the contract.
At the conclusion ofthejury trial, the court submitted a single liability question asking, “Did
Regency fail to comply with the Contract by failing to act in good faith in reducing its output of
crude helium to zero at the Lakin Plant?” Included in the definition of “good faith” was whether
Regency had a “legitimate business reason for eliminating its output under the Contract.” Keyes
argued the trial court ciTed in including the “legitimate business reason” because that strays from
“good faith” as defined by the U.C.C.
The jury found in favor of Regency by an 11 -l vote. This appeal followed.
Exclusion of Expert Testimony
in its second issue, Keyes areucs the trial court erred by excluding the testimony ot its
p1 csidtnt I) i id W ilkms ie irdin thc st intl uds of liii dLllIne It i i’us Wilkins is qu ilihcd
to provide such testimony based on his experience and training. Regency argues the trial court
properly excluded the testimony because (1) Keyes failed to preserve error, (2) Wilkinson was not
designated as an expert on reasonable commercial standards of fair dealing, and (3) his testimony
was not relevant or probative.
We agree Keyes has failed to preserve its issue far review. Error may not he predicated on
a ruling which admits or excludes evidence unless a timely objection appears in the record. In re
cOifliflitfllt?nt 0/ Tolleson, 09.08-0033$-CV, 2009 WL 1474730, at *5 (Tex. App.— Beaumont 2009,
no pet.) (mern, op.) (appellant failed to provide record cites to any objections at trial to expert’s
testimony); TEx. R. APP. P. 33. [(a). While Keyes has provided record cites to its proffer of
Wilkinson’s testimony, it has failed to provide record cites to any objections at trial, with the trial
court’s ruling. lrior to its offer of proof regarding Wilkinson’s testimony as an expert on reasonable
commercial standards of fair dealing. This court does not have a duty to review a voluminous record
without guidance from the appellant to determine whether its assertion of reversible error is valid.
Most Worshipjiil Prince Hall Grand Lodge v. Jachson, 732 S.W.2d 407, 412 (Tex. App.—Dallas
1987, writ ref’d n.r.c.). Failure to cite to relevant portions of the record waives appellate review,
TEx. R. App. P. 38.1(i).
Keyes argues it preserved its issue because it properly presented the excluded testimony of
Wilkinson in the form of a bill of review. Assuming Keyes properly presented its bill of review, this
does not alleviate Keyes of its duty to cite to where in the record it tried to offer Wilkinson’s
testimony during its case-in-chief and where the trial court excluded it.
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We further note that in its briet Keyes quotes the trial court as stating, “Well, I didn’t allow
it dill mu otii L ISL in LhILI irni m’ i ulinu t mds I lo t’ Lr tht ut thou to the reLord in thL hi id
is only to the trial conil S ruliiw dunnu the otter of proot and not to the case—in—chief Thus, while
the statement may’ indicate an objection and the trial courts rcasoninu is somewhere within the
voluminous record, we are not required to search tbr it without g1iidance.! Accordingly, Keyes has
failed to preserve this issue for review. We overrule its third issue.
Jury Charge Error
In its first issue, Keyes argues the trial court erroneously defined “good faith” in the jury
charge, and the error probably caused the rendition of an improper verdict. Regency responds the
trial court’s definition was correct and even if it was erroneous, it is irrelevant under these facts
because there is no reversible error based on Keyes’s arguments.
The trial court has considerable discretion to determine necessary and proper jury
instructions. Tex. WorIccT,s’ ‘C’oinp. Ins. Fund v. Mandlhuuer. 34 S.W.3d 909. 911 (Tex. 2000). When
a trial court refuses to submit a requested instruction on an issue raised by the pleadings and
evidence, the question on appeal is whether the request was reasonably necessary to enable the jury
to render a proper verdict. Id. at 912. The omission of an instruction is reversible error only if the
omission probably caused the rendition of an improperjudgment. TEx. R. App. P.44.1(a). On the
record before us, we agree with Regency that Keyes has failed to establish the definition of “good
faith” in the jury charge probably caused the rendition of an improper judgment.
however, we question shether an ohiecton and ruling exists in the record because appellate counsel stated during oral argument on
rebuttal that it is not captured in th record why Wilkinson’s testimony was excluded
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Question I asked, “I )id Renencv 1ii1 to comply with the ( ontract by Ihiling to act in good
luiith in reducing the output of crude helium to zero at the [akin Plant?” The charge included the
following instruction and definition:
You may find that Regency failed to comply with the Contract only if you
find that Retencv’s decision to shut down the [akin Plant was not made in eood
fail Ii.
“Good faith” means that Regency acted in accor(iance with commercial
standards of lair dealing in making its decisions, including whether Regency had a
legitimate business reason for eliminating its output under the Contract, as opposed
to a desire to avoid the Contract,
The jury answered “No” to this question. Keyes argues the Uniform Commercial Code
defines “good faith” as “honesty in fact and the observance of reasonable commercial standards in
fair dealing in the trade. U CC. 2—1 03(1 ) (201 2). Because this definition was statutory, it
contends the trial court’s dcl mition of “good faith” should have closely tracked the statute. See
Trinity Fire ins. Co. v. Kerri’ilie Hotel Co., 129 Tex. 3 10, 321, 103 S.W.2d 121, 126 (1937) (“It is
true that ordinarily where the statute defines a legal term the court should confine his charge to the
statutory definition.”). Instead. Keyes argues that by expanding the definition of “good Ihith” to
include whether Regency had a legitimate business reason for eliminating its output under the
contract, the court’s submitted charge was erroneous. Accordingly, Keyes argues this led to the
rendition of an improper verdict. We disagree.
First, Keyes’s argument that the trial court’s definition makes “legitimate business reason”
equivalent to “good faith” is incorrect. Rather, use of the word “including” in the definition means
the jury could consider a legitimate business reason as a factor in Regency’s decision to close the
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plant. However, the definition does not provide that a “legitimate business reason” is the only
consideration for the juiy or that good faith is the same as a legitimate business reason.
Further, Keyes has failed to cite to any evidence that Regency’s decision to take its output
to zero was not made honestly. The evidence Keyes cites is not relevant to the liability question.
It argues Regency told Keyes (1) it was “neutral” on crude helium; (2) it would take care of Keyes;
(3) it would keep Keyes whole; (4) any shut down of the Lakin Plant would only be temporary; (5)
Regency was going to refill the Lakin Plant with other gas; and (6) Regency would work with Duke
to make sure Keyes continued to receive streams of crude helium.
Section 4-1-304 of the Colorado Revised Statutes Annotated provides that “every contract
or duty within this title imposes an obligation of good faith in its performance and enforcement.”
Cow. REV, STAT. ANN. § 4-1-304 (West 2012); see also U.C.C. § l-304, However, comment 1
makes it clear that the good faith obligation has to be tied to a particular provision in the contract.
This section does not support an independent cause of action for failure to perform
or enforce in good faith. Rather, this section means that a failure to perform or
enforce, in good faith, a specific duty or obligation under the contract, constitutes a
breach of that contract or makes unavailable, under the particular circumstances, are
medial right or power. This distinction makes it clear that the doctrine of good faith
merely directs a court towards interpreting contracts within the commercial context
in which they are created, performed, and enforced, and does not create a separate
duty of fairness and reasonableness which can be independently breached.
Cow. REV. STAT. ANN. § 4-1-304 cmt. 1.
Here, the contract between Keyes and Regency provided that “Seller shall sell and Buyer
shall purchase all volumes of Crude Helium produced at the Lakin Plant.” None of the above
statements cited by Keyes to support its claim of Regency’s alleged dishonesty are tied to its
obligation to provide volumes of helium under the contract. Rather, the statements go towards what
The underlying Contract provides that ‘This Agreement, both as to interpretation and perfomsance, shall be governed by the laws of the
State of Colorado, without giving effect o its conflict of laws provisions”
Regency allegedly claimed it would do a/Icr the shutdown of the Lakin Plant, These statements do
not support any dishoncsty on Rcgcncy’s part in deciding to shut down thc plant l o concludc
otherwise would write obligations into the contract that do not exist. Thus, because Keyes has failed
to provide any evidence tying the good faith obligation required under section 4 1 3O4 to a particular
contract provision, the trial court’s instructions to the jury regarding good faith probably did not
cause the rendition of an improper verdict. See TEX. R App. P. 44.1(a). Accordingly, we overrule
Keyes’s second issue.
flirected Verdicts in Favor of Regency
In its third issue, Keyes argues the trial court erred by directing a verdict on its unreasonable
variation claim because it presented legally sufficient evidence to support it. It contends the plain
language of the V.C.C. prohibited Regency from unreasonably reducing the Lakin Plant’s output (in
this case to zero) from the contract’s stated estimates. Regency contends the trial court properly
directed a verdict because, as a matter of law, the U.C.C. exception concerning unreasonably
disproportionate increases in quantity does not apply to it as a seller under an output contract.
When evidence proves a fact that establishes a party’s right to judgment as a matter of law,
a directed verdict is proper. Rogers v. CIGNA Ins. (‘o. of Tex., 881 S.W.2d 177, 186 (Tex.
App.—Houston [1st Dist.] 1994, no writ). We review the grant of a directed verdict under well-
known standards governing legal sufficiency of the evidence. See So/ares v. So/ares, 232 S.W.3d
873, 883 (Tex. App.—Dallas 2007, no pet.). A directed verdict is proper when a defect in the
opponent’s pleadings makes them insufficient to support a judgment, the evidence conclusively
proves the fact that establishes a party’s right to judgment as a matter of law, or the evidence is
insufficient to raise an issue of fact. Byrd v. De/asancha, 195 S.W.3d 834, 836—37 (Tex.
App.—Dallas 2006, no pet.).
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The U.C.C. provides the following regarding output and requirements contracts:
(I) A term which measures the quantity by the output of the seller or the
requirements of the buyer, means such actual output or requirements as may occur
in good faith; except that no quantity unreasonably disproportionate to any stated
estimate or, in the absence of a stated estimate, to any normal or otherwise
comparable prior output or requirements, may be tendered or demanded,
U.C.C. § 2306(1) (West 2012); see also Cow. REv. ST,vr, ANN. § 4.2306(1) (West 2012).
The majority of courts to interpret this portion of the statute and address the issue of whether
a party to an output or requirements contract under IJ.C.C. section 2306(1) may reduce its output
or requirements, even to zero, despite stated estimates in the contract, have concluded a party may
do so as long as the reduction is made in good faith. See Empire Gas Corp. v. Am. Bakeries Co., 840
F.2d 1333 (7th Cir. 1988); Wiseco, Inc. v. Johnson Controls, Inc., 155 Fed. Appx 81.5 (6th Cir. 2005)
(unpublished); Brewster of Lynchburg, Inc. v. Dial Corp., 33 F.3d 355 (4th Cir. 1994); Atlantic
Track & Turnout Co. v. Perini corp., 989 F.2d 541 (1st Cir. 1993). Although neither Texas nor
Colorado has addressed this issue, Regency urges this Court to follow the majority view and apply
it to the present facts. Keyes, however, urges this Court to follow the minority view expressed only
by the Supreme Court of Alabama. See Simcaia, Inc. v. Am. Coal Trade, Inc., 821 So. 2d 197 (Ala.
2001).
The leading and most cited case on this issue is Empire Gas C’orporation v. American
Bakeries company, 840 F.2d 1333 (7th Cir. 1988). In that case, American Bakeries (AB) sought to
convert its fleet of delivery vehicles from gasoline to propane. Consequently, AB executed a
contract with Empire Gas (Empire) obligating AB to purchase “three thousand. . . [conversion]
units, more or less depending upon [AB’s] requirements. . ..“ Empire Gas, 840 F.2d at 1335. The
contract also obligated AB to purchase its propane motor fuel requirements solely from Empire. The
contract was to last four years. AB never ordered any equipment or propane from Empire after
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deciding not to convert its fleet to propane. Consequently, Empire filed suit, claiming that A13
breached the contract by eliminating its requirements. The jury returned a verdict in tavorot Empire.
On appeal. the Seventh Circuit rejected the notion that AB breached the contract simply
because it tailed to purchase any conversion units or propane horn Empire. The court concluded
that, pursuant to U.( C. § 2—306(1), a buyer may “reduce his requirements to zero if he was acting
in good faith, even though the contract contained an estimate of those requirements.” Id. at 133$.
Thus, the court determined that Empire could not recover under its contract claim unless the
evidence established that AB reduced its requirements in bad faith. Id. at 1339. In reaching this
conclusion, the Empire Gas court reasoned that the “unreasonably disproportionate” proviso of
U.C.C. § 2-306(l) merely explains the term “good faith” with respect to disproportionately large
demands. Id. at 133$.
According to the Empire Gas court, in promulgating this statute, the drafters of the U.C.C.
were concerned that when the market price rose above the contract price, a requirements contract
might allow a buyer to increase disproportionately his requirements and resell the product on the
open market at a profit. Id. The drafters intended the proviso to establish clearly that such actions
constituted bad faith. Id. However, “there is no indication that the draftsmen were equally, if at all,
concerned about the case where the buyer takes less than his estimated requirements, provided, of
course, that he does not buy from anyone else.” Id. Thus, the Empire Gas court held that U.C.C.
§ 2-306(1) does not proscribe unreasonably disproportionate reductions in a buyer’s requirements
if done in good faith. Id.
Similar to the majority of courts who have addressed this issue, we find the reasoning in
Empire Gas persuasive. See also Brewster, 33 F.3d 355; Wiseco, Inc., 155 Fed. Appx 8 15; Atlantic
Track & Turnout Co., 989 F.2d 541. Accordingly, although no Colorado authority has addressed
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this issue, we believe Colorado courts would adopt a similar interpretation for Colorado’s version
of U.C.C. § 2306( 1). See COLO. REV, STAT. ANN. § 42306. Thus, we hold that under Colorado
law, an output contract allows a seller to reduce the quantity produced to any amount, including zero,
so long as it does so in good faith. See, e.g., (Janusa Cotp. v. A&R Lohosco, Inc., 986 F. Supp. 723,
730 (explaining an output seller is allowed to reduce its output if done so in good faith, regardless
of stated estimates in a contract). If the seller wishes to reallocate some of the inherent risks in such
a contract, it may specify some minimum requirement.
In reaching this conclusion, we reject Keyes’s reliance on Simcala, Inc. v. American Coal
Trade, inc., 821 So. 2d 197 (Ala. 2001). Since its publication, no other court has followed its
holding.
We likewise reject Keyes’s argument that applying Colorado’s law of statutory construction
would result in a different conclusion, The Colorado General Assembly adopted Colorado’s U.C.C.
in 1965. Georg v. Metro Ftvtures Contractors, Inc., 178 P.3d 1209, 1212 (Cob. 2008). It
acknowledged that one of the purposes in adopting the U.C.C. was to simplify, clarify, and
modernize the law governing commercial transactions and “make uniform the laws among
jurisdictions.” Id. Thus, when a Colorado statute is patterned after a model code, as the Colorado
statute is after the U.C.C., we may draw upon available persuasive authority in reaching our decision.
Id.; see also West v. l?oberts, 143 P.3d 1037, 1041 (Cob. 2006). Keyes has not provided any
persuasive authority that Colorado courts would decide in favor of the minority view announced in
Simcala when the courts have acknowledged that the purpose in adopting the U.C.C. was to simplify
and clarify commercial transactions among jurisdictions. Accordingly, as a matter of law, the trial
court did not err by directing a verdict in favor of Regency on Keyes’s unreasonable variation claim.
We overrule Keyes’s third issue.
ll
In its final issue. Keyes contends the trial court erred by granting a directed verdict in favor
of Regency on Keyes’s best-efforts claim. Regency responds the trial court correctly determined,
as a matter of law, the Contract was not an exclusive dealing contract under the U.C.C.; therefore,
Regency was not required to use best efforts to supply Keyes with crude helium.
U.C.C. section 2-306(l)-(2) provides the following regarding output, requirements, and
exclusive dealings contracts:
(1) A term which measures the quantity by the output of the seller or the
requirements of the buyer, means such actual output or requirements as may occur
in good faith except that no quantity unreasonably disproportionate to any stated
estimate or, in the absence of a stated estimate, to any normal or otherwise
comparable prior output or requirements, may be tendered or demanded.
(2) A lawful agreement by either the seller or the buyer for exclusive dealing in the
kind of goods concerned imposes unless otherwise agreed an obligation by the seller
to use best efforts to supply the goods and by the buyer to use best efforts to promote
their sale.
U.C.C. § 2-306(1 )-(2) (West 2012); see also Cow, REv, STAT. ANN. § 4-2-306(1 )-(2) (West 2012).
The contract here provides that “Seller shall sell and Buyer shall purchase all volumes of
Crude Helium produced at the Lakin plant.” The contract requires Regency to sell all of its output
to Keyes; however, the contract does not require Keyes to purchase crude helium exclusively from
Regency. When a buyer agrees to buy the seller’s entire output of production, it is called an output
contract. See Lenape Res. Corp. v. Tenn. Gas Pipeline Co., 925 S.W.2d 565, 570 (Tex. 1996). Such
contracts are governed by U.C.C. section 2-306(1), which does not include the best efforts
requirement in U.C.C. section 2-306(2).
However, the contract also appears to involve an exclusive dealings agreement because
Regency agreed to exclusively sell crude helium to Keyes. We acknowledge the agreement is not
mutually exclusive because Keyes is not required to purchase only from Regency. With this in mind,
we consider the application of section 2-306(2).
While I i.C.C. section 2-306(2) applies to exclusive dealing contract, we conclude under these
flicts the trial court correctly directed a verdict on Keyes’s best efforts claim. The “best efforts”
doctrine was created to protect the party who is at the complete mercy of another party in an
exclusive dealing contract. Avenlis Environ. Science USA, L.P. v. Scoits, Ca, 383 F. Supp. 2d488,
505 (S.D.N.Y. 2005) (citing 2-6 Corbin on Contracts § 6.5); Tlgg Corp. v. Dow Corning Corp., 962
F.2d 1119, 1125 (3d Cir. 1992) (“The obligation to use best efforts to resell a product is imposed
upon those buyers engaged in ‘exclusive dealing in the kind of goods concerned. . . .“).
On its face, courts have noted this provision could be interpreted to mean that any party to
such a contract has an implied obligation to use best efforts. See MDC Corp., inc., 228 F. Supp. 2d
at 392. However, comment 5 of section 2.306(2) indicates the duty to use best efforts applies only
to those who receive the benefit of an exclusive commitment See U.C.C. § 2.306 cmt. 5 (“Under
such contracts the exclusive agent is required, although no express commitment has been made, to
use reasonable effort and due diligence in the expansion of the market or the promotion of the
product, as the case may be.”). Here, Regency was at the complete mercy ofKeyes because it agreed
to sell all its output ofcrude helium only to Keyes. It could not attempt to sell its product to others,
whereas, Keyes could take all of Regency’s product and still seek out crude helium from other
resources. As such, Keyes was in the position of receiving the benefit from the exclusive
commitment. Thus, the obligation of best efforts was not on Regency. Id.
Although Keyes argues “when constructing its business model and its marketing for its
purified helium,” it is just as entitled “to rely on Regency’s obligation to use its best efforts to draw
from the gas stream and furnish the crude helium,” it has not provided authorityto support a different
interpretation ofsection 2-306(2). Accordingly, we conclude Regency established as a matter oflaw
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that Keyess best ebrts claim under section 2—30((2) fails, and the trial court properly granted a
directed verdict in lavor of Reicncv. We overrule Kevess tinal issue.
Conclusion
Ehe udment of the trial court is athrmed.
JUS lICE // /
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1OO929FPO5
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.tnurt tif Appia1s
.YiftI! Thtrict uf xas at Oattaa
JUDGMENT
KEYES HELIUM COMPANY, Appellant Appeal from the 162nd Judicial District
Court of Dallas County, Texas. (TrCLNo.
No. O5 1 OOO929CV V O8O8738).
Opinion delivered by Justice O’Neill,
REGENCY GAS SERVICES, LP. F/K/A Justices Richter and Myers, participating.
REGENCY GAS SERVICES, LLC, ET
AL, Appellees
In accordance with this Court’s opinion of this date, the judgment of the trial court is
AFFIRMED. It is ORDERED that appellee Regency Gas Services, LP. f/k/a Regency Gas
Services, I. L C et al recoer their costs of this appeal from appellant Keyes Helium Company
Judgment entered December 3, 2012.
r\1i( II\ I .1. () NJ III
J I IS I I( I