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Sundance Energy, Inc. v. NRP Oil and Gas LLP

Court of Appeals of Texas, First District

August 15, 2019


          On Appeal from the 125th District Court Harris County, Texas Trial Court Case No. 2015-47595

          Panel consists of Justices Lloyd, Landau, and Countiss.



         Appellant, Sundance Energy, Inc. ("Sundance"), challenges the trial court's judgment entered, after a trial on damages and a bench trial on attorney's fees, in favor of appellee, NRP Oil and Gas LLP ("NRP"). In two issues, Sundance contends that the evidence is legally and factually insufficient to support the trial court's award of attorney's fees to NRP and the evidence is legally and factually insufficient to support the jury's damages award because the jury "failed to account for uncontroverted evidence" of an offset amount.

         We affirm.


         In its amended petition, NRP alleged that it entered into a Purchase and Sale Agreement (the "PSA") with Sundance to purchase "Sundance's interest in certain oil and gas leases and wells located in three North Dakota counties." The parties agreed to a purchase price of "approximately $35 million." Sundance retained "the broad obligation to pay for certain pre-sale liabilities (the 'Retained Liabilities') associated with drilling, completing, and operating the wells included among the assets purchased." And, "NRP agreed to be responsible for liabilities accruing after the sale."

         NRP alleged that the PSA provided:

[A]ll liabilities of Seller for capital expenses, joint interest billings, lease operating expenses, lease rentals, shut-in payments, drilling and completion expenses, workover expenses, geological costs, geophysical costs, and other exploration or development expenditures and costs (collectively, "Property Expenses") that are assessed for or attributable to periods of time or operations during Seller's ownership of the Assets prior to the Effective Time (regardless of whether such operations were proposed or approved after the Effective Time), including all costs and expenses relating to drilling and completion of wells proposed to and approved by Seller prior to the Effective Time (regardless of whether such drilling and completion, or the costs incurred in connection with such activities occurred before or after the Effective Time); provided, however, that Property Expenses shall not include (i) costs and expenses relating to plugging or abandonment of the Wells, which are assumed by Buyer as Assumed Liabilities regardless whether such obligations arise prior to or after the Effective Time, or (ii) costs and expenses relating to environmental matters, which are addressed exclusively in Article 6 and Article 14[.]

(alterations in original.) The "Effective Time" is defined in the PSA as "9 a.m. (Central Standard Time) on September 1, 2013."

         NRP further alleged that Sundance "agreed to cover (or reimburse NRP for) the Retained Liabilities in the indemnification provisions set forth in ¶ 14.1 of the PSA," which provided that Sundance agreed to indemnify NRP for "ALL LOSSES ARISING FROM OR COMPRISING THE RETAINED LIABILITIES." And Sundance "further agreed that its obligation to indemnify NRP for Retained Liabilities would continue after the sale 'for a period in perpetuity.'"

         Before and after the sale, NRP received a first set of joint-interest billings ("JIBs") totaling $146, 000 "from companies operating wells included among" the assets purchased in the PSA. These JIBs "requested payment for costs that pre-dated the Effective Time" and were subject to the indemnity provisions in the PSA. NRP paid these JIBs, and later forwarded them to Sundance for reimbursement. Sundance agreed that these JIBs were part of the Retained Liabilities and paid the requested amount of $146, 000 in full. NRP subsequently "received additional JIBs totaling approximately $900, 000 for liabilities that, just like the initial JIBs, were also 'assessed for or attributable to' Sundance's ownership of the Assets before the Effective Time." NRP paid the JIBs and again forwarded a request to Sundance for reimbursement pursuant to the PSA. However, Sundance refused to reimburse NRP for the additional JIBs.

         NRP asserted causes of action against Sundance for breach of contract and for a declaratory judgment. It sought compensatory and actual damages, declarations, pre- and post-judgment interest, and reasonable and necessary attorney's fees pursuant to Chapters 37 and 38 of the Texas Civil Practices and Remedies Code.

         In its amended answer, Sundance asserted a general denial as well as the affirmative defenses of "SETTLEMENT/RELEASE," "ENTITLEMENT TO OFFSET," "WAIVER," and "ESTOPPEL/QUASI-ESTOPPEL."

         At trial, David Hartz testified that he was the vice president of the oil and gas division of NRP at the time that the PSA was signed. And he joined NRP in late 2010 to build its oil and gas division. Under Hartz's supervision, NRP became aware that Sundance had a "larger portfolio" of assets in the Williston Basin in North Dakota and Montana.

         Hartz explained that Sundance's portfolio consisted of "non-operated" assets, meaning the assets were drilled, completed, produced, and administered by another partner called the "operating" partner. "The non-operator typically [was] a leaseholder within the same unit or designated drilling spacing unit," which had to "approve certain operations," "give their consent to the operator" for certain operations, and then "pay their share of the invoices and then collect their share of the revenue." The majority of the wells purchased by NRP were operated by EOG Oil and Gas ("EOG").

         Hartz further testified that before executing the PSA, NRP performed a great amount of due diligence to determine the value it would place upon the properties to be purchased. At that time, there was a group of wells that was being completed and NRP was "not provided information to say how much capital or how much they had paid for those operations to date." In other words, NRP was aware that there were still outstanding bills for this group of wells that would be sent by the operating partner, EOG. However, Sundance could not provide information regarding "how much was remaining on those wells to be drilled" for NRP to analyze the remaining costs for purposes of valuing the assets. Hartz explained that this information was typically provided in an "operating" statement in oil and gas transactions-"which is essentially an income statement for . . . particular properties and capital." Due to this missing information, NRP and Sundance reached a compromise where Sundance agreed to cover any remaining costs on the assets so that NRP would not "have to come out of pocket for any of this in the future once [it] own[ed] the assets." Accordingly, NRP made an offer to purchase the assets, valuing the assets based on the compromise.

         Hartz also testified that the PSA, which was entered into evidence, provided that Sundance had certain Retained Liabilities that it would be responsible for even after NRP owned the assets. Specifically, Hartz testified that these Retained Liabilities included: (1) expenses for large capital items such as equipment- typically related to drilling and production of a well and not ongoing maintenance; (2) JIBs-which were "essentially the bills or the invoices . . . receiv[ed] from the operator"; (3) lease operating expenses-which are "essentially the normal operating expenses," such as emptying the tank where oil was stored or electrical and water bills; (4) lease rentals if a property was leased from the government or a private landowner; (5) shut-in payments, if the land was leased, for shut-in or non-producing wells; (6) drilling completion expenses-a broad category of expenses shared by those in a partnership to drill, complete, and "put a well under production"; (7) workover expenses-which were incurred to "reestablish production" for a well when something had gone wrong; (8) geological costs, such as expenses for data "in the exploration or development of prospects"; (9) geophysical costs, such as seismic or other data collected relating to the "field of geophysics"; (10) and "other exploration or development expenditures and costs" which was a "catchall for remaining expenses." However, Sundance's liability for these costs was limited to "costs that [were] assessed for or attributable to periods of time or operation during" Sundance's "ownership of the assets prior to the effective time." Hartz testified that, per the PSA, this indemnification was to continue in perpetuity. He further explained that NRP would pay for any "normal operating expenses associated with owning the assets or anything that [NRP] would approve during [its] ownership of the assets, drilling of a new well, et cetera" incurred after the effective date of the PSA, which was September 1, 2013.

         Hartz explained that following execution of the PSA, NRP made several requests for "indemnification" pursuant to the PSA based on JIBs it received from EOG. The first was for $146, 304.85. Sundance quickly responded to NRP's request by admitting its responsibility to cover the expenses and paid NRP the requested amount. After receiving additional JIBs from EOG, NRP again requested indemnification from Sundance. NRP made subsequent requests for reimbursement, which remained unpaid at the time of trial. In total, Hartz testified that NRP was seeking damages based on its requests for indemnification to Sundance in the amount of $988, 254.

         At trial, a copy of the PSA was admitted into evidence. It provides, in relevant parts, as follows:

4.1 Closing Adjustments. With respect to matters that can be determined as of the Closing, Seller shall prepare, in accordance with the provisions of this Article 4, a statement (the "Closing Adjustment Statement") with relevant supporting information setting forth each adjustment to the Base Purchase Price submitted by Seller in accordance with this Agreement. Seller shall submit the Closing Adjustment Statement to Buyer, together with all records or data supporting the calculation of amounts presented on the Closing Adjustment Statement, no later than five (5) business days prior to the scheduled Closing Date. Prior to the Closing, Buyer and Seller shall review the adjustments proposed by Seller in the Closing Adjustment Statement and shall work in good faith to arrive at agreed adjustments. Agreed adjustments shall be taken into account in computing any adjustments to be made to the Base Purchase Price at the Closing. To the extent actual figures are not available, estimates shall be used subject to final adjustments as described in Section 4.4 below.
. . . .
4.4 Post-Closing Adjustments. A post-closing adjustment statement (the "Post-Closing Adjustment Statement") shall be prepared and delivered by Seller to Buyer within ninety (90) days after the Closing, proposing further adjustments to the calculation of the Purchase Price based on the information then available. Seller or Buyer, as the case may be, shall be given access to and shall be entitled to review and audit the other Party's records pertaining to the computation of amounts claimed in such Post-Closing Adjustment Statement. Within fifteen (15) days after receipt of the Post-Closing Adjustment Statement, Buyer shall deliver to Seller a written statement describing in reasonable detail its objections (if any) to any amounts or items set forth on the Post-Closing Adjustment Statement. If Buyer does not raise objections within such period, then the Post-Closing Adjustment Statement shall become final and binding upon the Parties at the end of such period. If Buyer raises objections, the Parties shall negotiate in good faith to resolve any such objections. If the Parties are unable to resolve any disputed item within (15) days after Buyer's receipt of the Post-Closing Adjustment Statement, any such disputed item shall be submitted to a nationally recognized independent accounting firm mutually agreeable to the Parties who shall be instructed to resolve such disputed item within thirty (30) days. The resolution of disputes by the accounting firm so selected shall be set forth in writing and shall be conclusive, binding upon the Parties and non-appealable, and the Post-Closing Adjustment Statement shall become final and binding upon the Parties on the date of such resolution. The fees and expenses of such accounting firm shall be paid one-half by Buyer and one-half by Seller. After the Post-Closing Adjustment Statement has become final and binding on the Parties, Seller or Buyer, as the case may be, shall pay to the other such sums are due to settle accounts between the Parties due to difference between the estimated Purchase Price paid pursuant to the Closing Adjustment Statement and the actual Purchase Price set forth on the Post-Closing Adjustment Statement.

         Article 14 provides that Sundance as the Seller "SHALL TO THE FULLEST EXTENT PERMITTED BY LAW, RELEASE, DEFEND, INDEMNIFY, AND HOLD HARMLESS BUYER . . . FROM AND AGAINST . . . . ALL LOSSES ARISING FROM OR COMPRISING THE RETAINED LIABILITIES." Further, "Seller shall be obligated to indemnify Buyer under Section 14.1(c) for any Loss arising from the Retained Liabilities for a period in perpetuity."

         Cathy Anderson testified that she was the Chief Financial Officer of Sundance at the time NRP made its requests for indemnification, however she was not involved in negotiating or drafting the PSA. Anderson testified that Sundance paid NRP's initial request for indemnification because it was very close to the deadline allowed in the PSA for post-closing adjustments and they "were trying to not cause an issue," although they believed that the charges "should have [been] included" in any post-closing adjustments. After receiving NRP's second request for indemnification, Sundance began to "really dig[] into the details and look[] at what was coming through." Anderson explained that the PSA provided that Sundance would continue to cover "drilling and completion costs" for the wells that had been drilled close to the effective date of the PSA. And after "digging in[]", Sundance realized "other" charges that did not concern drilling and completion were "coming through." Sundance then hired a "joint interest auditor" to research the charges in the additional JIBs for which NRP sought reimbursement.

         According to Anderson, Sundance ultimately rejected NRP's request for reimbursement for the remaining amounts. And Anderson sent Hartz a letter, a copy of which was admitted into evidence at trial, explaining Sundance's reasoning behind refusing to reimburse NRP. That letter, in part, reads as follows:

We have completed our review of the supplemental billings from EOG you sent us beginning last July. After analyzing the specific items and reviewing the PSA, we have concluded that Sundance does not have responsibility for these billings, and so we respectfully decline your request to reimburse NRP for them. I will explain our thinking.
First, $301, 503 of the charges related to the installation of facilities, such as tanks, gathering lines, etc. Facilities costs are not "drilling and completion costs" and Sundance never agreed to retain liability for facilities costs . . . .
Second, the remaining $606, 063 of the JIBs do cover costs that would be classified as drilling and completion costs, but we think that responsibility for those costs was finally settled between the parties at final settlement. We base this conclusion on the language in Section 4.4 of the PSA, which states that the Post-Closing Adjustment Statement shall be "final and binding" on the parties either if not challenged or following resolution of any challenge by the accounting firm. Section 4.1 of the PSA provides for settling allocations of costs between the parties on a preliminary basis at closing based on estimates, "subject to final adjustments as provided in Section 4.4 ...

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