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Norhill Energy LLC v. McDaniel

Court of Appeals of Texas, Second District, Fort Worth

April 13, 2017



          PANEL: MEIER, GABRIEL, and SUDDERTH, JJ. GABRIEL, J., filed a dissenting and concurring opinion.



         I. Introduction

         In three issues, Appellant Norhill Energy LLC appeals the trial court's judgment in favor of Appellee George McDaniel. We reverse and render.

         II. Factual and Procedural Background

         On September 20, 2010, Norhill and McDaniel entered into a two-year oil and gas lease on 240 acres of McDaniel's land. Norhill's owner, Steve Selinger, admitted that at the time the lease was executed, he had minimal experience in the oil and gas business. In fact, the McDaniel lease was the first one Norhill had ever tried to drill.

         The lease provided for a two-year primary term and for extension after the primary term if Norhill's "drilling or reworking operations" were continued "in good faith and with reasonable diligence." As the end of the primary term approached, Norhill had drilled six holes on McDaniel's property, each yielding no production. According to Selinger, although there was "a lot of oil there, " Norhill's pumps couldn't "get it to come through the holes." Instead, they only managed to extract water, which, according to Selinger, was blocking the oil from coming out.

         Selinger testified that he planned to drill another well in order to extend the lease past September 20, 2012, but that in June 2012, McDaniel convinced him to try using a submersible pump to remedy the water problem instead, an effort that McDaniel assured him would constitute "reworking" under the lease. According to Selinger and Stanton Freeze, who oversaw production on the McDaniel lease for Norhill, Selinger relied on McDaniel's assurance in deciding to use the submersible pump instead of drilling a seventh hole.

         According to Freeze, the pump was installed on June 29, but after a while it stopped working. Freeze testified that Wayne Wooldridge was in charge of monitoring the well for Norhill, but his testimony conflicted with Selinger's recollection at trial that by September 2012, Wooldridge had not worked for Norhill for more than a year. Nevertheless, according to Freeze, in late September or early October, Wooldridge called him to report that something was wrong with the pump. Freeze said that he assumed that Wooldridge would fix it and start it back up but that Wooldridge did not.

         Freeze later learned that McDaniel, not Wooldridge, was the person who was actually monitoring the well. And, according to McDaniel's records and testimony, the pump stopped operating sometime around September 2, after which time it was never restarted. Freeze disagreed, testifying that he recalled that the pump was still running at some point after September 20. An electricity bill for the property was also admitted into evidence to demonstrate that Norhill was still running electricity on the lease in October 2012.

         According to Selinger, later in October, when the parties entered into a new agreement, McDaniel repeated his reassurance that the use of the submersible pump had constituted "reworking" sufficient to extend the primary lease-term. McDaniel denied this, testifying that he had never agreed that the lease would be extended beyond September 20 and that he had never had a conversation with Selinger to that effect.

         One month after the expiration of the primary term, on October 19, McDaniel and Norhill executed a new agreement that took the leasehold in a new direction. Instead of Norhill reworking or renewing the lease, the parties executed an agreement that Norhill would assign the lease back to McDaniel.

         The new agreement comprised two single-page documents, the first of which, entitled "Assignment of Oil and Gas Lease, " provided that McDaniel would pay $50, 000 to Norhill in exchange for Norhill's assignment of its interest in the prior oil and gas lease on the property. The last sentence of the Assignment recited that it was "EXECUTED this 19 day of October, 2012, but effective only upon the receipt by [Norhill] of the consideration set forth above."

         The second document, a letter agreement, added various other terms and conditions to the agreement, such as ownership of the equipment at the drill site and plugging obligations and liability. In it, the parties agreed that "[McDaniel] will pay to [Norhill] the consideration of $50, 000 as set forth in the Assignment within thirty (30) days of the date hereof, this agreement being executed simultaneously with the Assignment." The final provision of the letter agreement included an integration and merger clause: "In conjunction with the Assignment, this sets forth the entire agreement by and between the parties hereto." Although Norhill took the position at trial that it had performed under the agreement by assigning the lease back to McDaniel, no assignment was offered or received into evidence at trial, other than the October 19 Assignment that expressly provided that it was "effective only upon the receipt" of $50, 000 from McDaniel.

         After more than thirty days passed and McDaniel still had not paid Norhill the $50, 000, Norhill sued McDaniel for breach of contract, fraud, money had and received, and promissory estoppel.

         Selinger testified at trial that the new agreement was struck between the parties when McDaniel approached Norhill with an offer to repurchase the lease for $50, 000 so that McDaniel, in turn, could sell the lease to another entity for $60, 000. Selinger stated that Norhill's execution of the October 19 documents reflected the parties' agreement to this arrangement.

         According to Selinger, prior to the expiration of the primary term of the lease, Norhill, too, had received an offer to purchase the lease for $50, 000. At trial Selinger claimed, "I had 50, 000 in my pocket. I had the same fifty from [McDaniel] until he decided he would keep it all." In other words, Selinger testified that he was poised to receive $50, 000 in exchange for the lease either way, the only question being which party would receive the assignment from him.

         Freeze also characterized the October 19 agreement as an "either/or" proposition, but his understanding was not that Norhill would consider assigning the lease to a third party. Instead, Freeze understood that the parties agreed that either McDaniel would sign the October 19 agreement or Norhill would bring a rig to the property to drill in order to extend the lease.

         Although McDaniel initially denied that he had agreed to pay $50, 000 to purchase the lease back from Norhill, alleging that Selinger had forged his name to the October 19 documents, McDaniel conceded at trial that he had signed the agreement, that he had understood it, and that in it he had agreed to pay $50, 000 to Norhill. But, according to McDaniel, by the time he signed the October 19 agreement, he had already leased the property to a third party. McDaniel testified that he signed the October 19 agreement because Freeze had told him that he would be in trouble for having leased the property to someone else if he did not sign it and pay $50, 000 to Norhill. McDaniel testified, "I thought I was in trouble for signing with the new contract. That's what they led me to believe."

         Sometime after October 19, when the $50, 000 was not forthcoming, Freeze testified that he spoke with McDaniel in passing, that McDaniel acknowledged that he owed Norhill $50, 000, and that McDaniel told him that he was still trying to get the money from "these people up in Mineral Wells." Selinger testified that he was "patient" with McDaniel for "four or five months, " because McDaniel assured him that he had not "closed his deal" with the new leaseholders. "And then all of the sudden he got the money, and a few days afterwards he said, ["Y]ou know, I would rather not pay you. I'm going to try to find a way out of this deal, and I'm going to talk to a lawyer, " and "I really don't want to pay you this. I need the money more than you, and I'm going to talk to a lawyer and see if I can get out of paying you." At trial McDaniel generally confirmed this account by Selinger. McDaniel admitted that when he received the money, he told Selinger that he was going to try to find a way out of paying him and that he also told Selinger that he needed the money more than Selinger did.

         At trial, Norhill argued that McDaniel was a liar who led Norhill to rely on the lease remaining in effect, then agreed to pay Norhill $50, 000, and then reneged on the deal. Norhill asked for the jury "to award $50, 000 in damages for each of the causes of action, " and assured the jury that "the judge will reduce any damages awarded so that there's no double recovery."[1]

         McDaniel argued that Selinger was the liar and pointed out the disparity between electrical usage before and after September 20 as proof that the pump had not been operating to extend the lease. McDaniel further argued that while he did not pay the money, he had been duped into ...

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