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Dimock Operating Co. v. Sutherland Energy Co., LLC

Court of Appeals of Texas, Seventh District, Amarillo

April 24, 2018

DIMOCK OPERATING COMPANY AND JOE W. DIMOCK D/B/A DIMOCK PETROLEUM, APPELLANTS
v.
SUTHERLAND ENERGY CO., LLC, APPELLEE

          On Appeal from the 46th District Court Hardeman County, Texas Trial Court No. 11098, Honorable Dan Mike Bird, Presiding

          Before QUINN, C.J., and CAMPBELL and PARKER, JJ.

          MEMORANDUM OPINION ON REHEARING

          Judy C. Parker, Justice

         Following our opinion and judgment of March 13, 2018, both parties moved for rehearing. We deny both motions. We withdraw our March 13 opinion and judgment and substitute the following opinion and corresponding judgment in its place.

         This is an appeal from three partial summary judgment orders, an order denying joinder of parties, and a final judgment, all arising from disputes over an oil and gas farmout agreement. Appellants raise sixty-six issues on appeal. We affirm in part and reverse and remand in part.

         Background

         On November 20, 2012, Sutherland Energy Co., LLC, and Dimock Operating Company and Joe W. Dimock, d/b/a Dimock Petroleum (collectively "Dimock"), signed a Seismic Exploration and Farmout Agreement (SEFA). The two primary aims of the SEFA were drilling a replacement well for the Roy Hamrick No.1 well on Dimock's lease and exploring and developing a surrounding fifteen-section area of Hardeman County, which the parties called the "Hamrick Area 3D Shoot." In conjunction with the SEFA, the parties signed an Operating Agreement, also dated November 20, 2012.

         Sutherland was the "farmee" under the SEFA and, as such, fronted the costs and assumed the risks of drilling the replacement well. Sutherland had 240 days to spud the replacement well. If the well was not spud within 240 days, Sutherland would forfeit the $50, 000 drilling deposit it had paid Dimock and lose all funds it had spent on the project. If, however, the well was successfully completed, Dimock would assign its interest (100% of the working interest) in the drilling unit to Sutherland and Sutherland could recover two times its costs from the well's production revenue as compensation. The SEFA provided, "When the Farmee's cumulative revenue equals two (2) times the Farmee's capital cost the Initial Earning Well will have reached 'project payout.'" The parties agreed that upon "project payout, " Sutherland would assign well operations and 51% of the working interest back to Dimock, while the remaining 49% of the working interest would be assigned to various charities.

          In addition to the drilling obligation, Sutherland had the right to conduct seismic exploration operations on the area covered by the SEFA. Under the agreement, Sutherland and Dimock would share all seismic data obtained from the project, and Dimock would have the option of participating in any wells Sutherland successfully drilled on Dimock's leases or on acreage pooled with those leases. The SEFA provided that Sutherland "shall use its sole discretion to determine the type, nature, timing and extent of all Seismic Exploration Operations." Sutherland began its exploration and development efforts in the Hamrick Area 3D Shoot shortly after the SEFA was signed.

         Sutherland timely completed a replacement well, named the Hamrick #3. The Hamrick #3 began producing oil in June of 2013 and, pursuant to the terms of the SEFA, Dimock refunded Sutherland's $50, 000 drilling deposit and assigned its interest in the well to Sutherland. Sutherland did not perform any seismic shooting prior to drilling the replacement well.

         In early November of 2013, production revenue from the Hamrick #3 had reached just over $1, 000, 000, approximately the amount it had cost to drill and complete the well. Meanwhile, Sutherland's seismic exploration and development efforts continued elsewhere on the Hamrick Area 3D Shoot.

         By March of 2014, revenue from the Hamrick #3 totaled $2, 195, 191. Because this amount was greater than double Sutherland's stated costs of $1, 007, 445 for drilling and completing the well, Dimock claimed that project payout had been reached. Accordingly, in April of 2014, Dimock instructed Sutherland to refrain from incurring further capital costs on the project. Dimock asserted that the capital costs Sutherland was entitled to recover (times two) were limited to those expended for the Hamrick #3, and that costs Sutherland incurred related to other portions of the Hamrick Area 3D Shoot were not recoverable from the Hamrick #3's revenues. Based on its belief that project payout had occurred, Dimock demanded that Sutherland assign a 51% working interest and deliver operations of the Hamrick #3 to Dimock. Sutherland responded that project payout had not yet occurred and the SEFA authorized its continued expenditures. In response, Dimock contacted the buyer of the Hamrick #3's oil in an effort to have payments to Sutherland suspended.

         Sutherland then filed the underlying lawsuit, alleging breach of contract by Dimock and seeking declaratory judgment as to the legal effect of the SEFA's terms. Dimock filed counterclaims for breach of contract, breach of fiduciary duty, fraud, and declaratory judgment. The parties amended their pleadings several times over the course of the case and most claims were resolved through a series of partial summary judgment motions, which are more fully addressed below. Additionally, the parties reached a partial settlement of their claims in August of 2015, while the suit was pending. A jury trial resolved the matter of attorney's fees.

         On appeal, Dimock claims the trial court erred in granting Sutherland's first, third, and fourth motions for partial summary judgment, in denying Dimock's Motion for Leave to Join Parties, and in entering the Final Judgment.

         Summary Judgment Standard of Review

         We review the trial court's summary judgment de novo. Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 215 (Tex. 2003). Summary judgment is proper only when there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. Shah v. Moss, 67 S.W.3d 836, 842 (Tex. 2001); Tex.R.Civ.P. 166a(c). When reviewing a summary judgment, we take as true all evidence favorable to the nonmovant, and we indulge every reasonable inference and resolve any doubts in the nonmovant's favor. Knott, 128 S.W.3d at 215.

         Discussion

         Issues as to First Partial Summary Judgment

         As reflected in their pleadings, the parties disputed what expenditures were properly included as capital costs that were to be considered in determining when project payout occurred. In its first motion for partial summary judgment, Sutherland sought summary judgment on two issues: (1) on its declaratory judgment action on the basis that "project payout" is clearly defined in the SEFA and the definition of capital costs includes land and seismic expenditures, and (2) that "project payout" had not yet occurred. The trial court granted Sutherland's motion. Dimock raises seventeen issues challenging this partial summary judgment.

         "Project Payout"

         We will first address the matter of project payout. At the hearing on the first motion for summary judgment, Sutherland's counsel announced that it was not pursuing summary judgment on the second basis stated in its motion, i.e., the non-occurrence of project payout. Counsel stated, "We ask for two points of relief in the Motion for Summary Judgment. Today, we're only going to ask for one. We're not going to ask for a ruling from the Court that a project payout has actually occurred. We believe if the Court rules on the issue we are asking you to rule upon, that issue will be resolved." Our review of the order[1] indicates that it does not address Sutherland's project payout claim. Thus, because Sutherland withdrew its request for summary judgment on its claim that project payout had not occurred and because the order granting partial summary judgment does not address the project payout claim, there was no adjudication that project payout had not been reached. Therefore, because the summary judgment did not encompass this issue, we overrule Dimock's issues which assert that Sutherland failed to establish, as a matter of law, that project payout had not occurred.[2]

         Declaratory Judgment Regarding "Capital Costs"

         We turn next to the declaratory judgment issue. By this issue, Sutherland sought a declaration that costs incurred for land and seismic for the Hamrick Area 3D Shoot are included in the calculation of capital costs when determining project payout. The dispute on the inclusion of land and seismic costs centers on two provisions, one of which is in Exhibit A to the SEFA and one of which is in the Operating Agreement, Exhibit C to the SEFA.

         Exhibit A to the SEFA provides the following instruction: "When the Farmee's cumulative revenue equals two (2) times the Farmee's capital cost the Initial Earning Well will have reached "project payout." Exhibit A also provides, "The Farmee's capital cost is defined as cost incurred by Farmee for land and seismic for the Hamrick Area 3D Shoot (defined in Exhibit B), a fifty thousand dollar ($50, 000) prospect fee, and cost for drilling, testing, completing, and equipping, the Initial Earning Well." Further, section 2.1 of the SEFA provides:

Farmor [Dimock] grants to Farmee [Sutherland] the sole, exclusive, and irrevocable right to conduct Seismic Exploration Operations on, under, and in the Subject Leases during the term of this Agreement, including any appropriate or necessary related rights of ingress and egress. In conducting all operations under this Agreement, Farmee shall use its sole discretion to determine the type, nature, timing, and extent of all Seismic Exploration Operations.

         Sutherland relies on these provisions to support its position that its land and seismic operations for the Hamrick Area 3D Shoot are recoverable as capital costs.

         Dimock, on the other hand, points to provisions in the parties' Operating Agreement, signed at the same time as the SEFA, for its claim that not all of Sutherland's expenditures for land and seismic are recoverable. Specifically, Dimock notes that the Operating Agreement provides, "Operator [Sutherland] shall not undertake any single project reasonably estimated to require an expenditure in excess of twenty-five thousand Dollars ($25, 000.00) except in connection with the drilling, Sidetracking, Reworking, Deepening, Completing, Recompleting or Plugging Back of a well that has been previously authorized by or pursuant to this agreement . . . ." Based on this provision, Dimock urges that Sutherland's seismic expenses and land expenses, unless previously authorized by Dimock, are subject to a contractual limit of $25, 000.

         Sutherland counters that the Operating Agreement does not apply. While it acknowledges that the Operating Agreement was signed and made effective on the same date as the SEFA, Sutherland urges that the Operating Agreement could not and did not become operative until later, when there was joint ownership of the leasehold interest. Thus, Sutherland contends that the parties did not intend for the Operating Agreement to be effective on the stated effective date, but on some other, future date. Moreover, Sutherland observes, the SEFA provides, "The Operating Agreement shall be subject to this Agreement so that in the event of any conflict between the Operating Agreement and this Agreement, this Agreement shall be the governing Agreement."

         Again, Sutherland sought a declaration that costs incurred for land and seismic for the Hamrick Area 3D Shoot were properly included in the calculation of capital costs, which in turn determine project payout. In granting Sutherland's partial motion for summary judgment, the trial court made four determinations, two of which are pertinent to our analysis of this issue: First, that Sutherland's "costs incurred for land and seismic operations for the Hamrick Area 3D Shoot are 'capital costs' to be considered in determining 'project payout' under the Agreement, " and second, that Sutherland's ability to incur such costs "is not restricted by the parties' joint operating agreement."

         As for the first determination, we agree. Based on the language of the parties' agreement set forth above, Sutherland was entitled to judgment as a matter of law that land and seismic operations for the Hamrick Area 3D Shoot are capital costs. Again, Sutherland's capital cost is expressly defined by the agreement as "cost incurred by Farmee [Sutherland] for land and seismic for the Hamrick Area 3D Shoot (defined in Exhibit B), a fifty thousand dollar ($50, 000) prospect fee, and cost for drilling, testing, completing, and equipping, the Initial Earning Well."

          Dimock argues that, due to the placement of the comma after the word "equipping, " the definition of "capital costs" is ambiguous. Dimock suggests that this comma creates a limiting clause, signifying that "the Initial Earning Well" modifies all three elements in the series (land and seismic for the Hamrick Area 3D Shoot, the prospect fee, and cost for drilling, testing, completing, and equipping). We reject this argument. The placement of this comma to indicate a modifying element is not grammatically correct. We read the definition of capital costs to include three components: (1) land and seismic for the Hamrick Area 3D shoot, (2) the prospect fee, and (3) cost for drilling, testing, completing, and equipping the Initial Earning Well. We find additional support for this construction by looking at the contract as a whole. In light of the parties' overall intent to explore a fifteen-section tract of land and drill multiple wells, we cannot conclude the comma directs us to the meaning suggested by Dimock.

         As for the court's second determination, we again agree. The trial court did not specify the reason it concluded that Sutherland's ability to incur land and seismic costs is not restricted by the Operating Agreement, e.g., whether it was because the Operating Agreement was not yet in effect, or because the terms of the SEFA controlled over the terms of the Operating Agreement. If the trial court does not specify a basis for granting summary judgment, the judgment will be affirmed if any ground asserted in the motion has merit. Star-Telegram, Inc. v. Doe, 915 S.W.2d 471, 473 (Tex. 1995).

         In our opinion, although it has not been established as a matter of law that the stated effective date of November 20, 2012, is not the effective date of the Operating Agreement, it has been established that the terms of the SEFA control to the extent they conflict with the terms of the Operating Agreement. The SEFA gives Sutherland discretion "to determine the type, nature, timing, and extent" of seismic operations. We conclude that this authorization controls over the Operating Agreement's restriction providing that Sutherland was not to undertake any project reasonably estimated to cost more than $25, 000. Therefore, we overrule Dimock's issues on this point.

         Remaining Issues in First Partial Summary Judgment

         We also overrule Dimock's issue by which it argues that the trial court erred in granting summary judgment because an adequate time for discovery had not passed. Sutherland's first motion for partial summary judgment does not state that it is a no-evidence motion, nor does it refer to Texas Rule of Civil Procedure 166a(i). The motion does not challenge any specific elements of a claim. However, the motion does attach evidence, as is required in a traditional motion. See Tex.R.Civ.P. 166a(c). We therefore conclude that Sutherland's first motion is, in substance, a traditional motion for summary judgment and will construe it as such. Accordingly, there is no requirement for an adequate time for discovery to have passed before the trial court considered the ...


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