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Indian Oil Company, LLC and William E. Trotter, Ii v. Bishop Petroleum Inc

April 25, 2013

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

The opinion of the court was delivered by: William J. Boyce Justice

Reversed and Remanded and Opinion filed April 25, 2013.

In The Fourteenth Court of Appeals

OPINION

William E. Trotter, II appeals a judgment in favor of Bishop Petroleum Inc. in this contract dispute.*fn1 We reverse and remand.

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 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 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 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 $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 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?

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 ...


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