GAITHER PETROLEUM CORPORATION v. HILCORP ENERGY I, L.P.--Appeal from 253rd District Court of Liberty County

NUMBER 13-01-705-CV

COURT OF APPEALS

THIRTEENTH DISTRICT OF TEXAS

CORPUS CHRISTI

GAITHER PETROLEUM

CORPORATION, Appellant,

v.

HILCORP ENERGY I, L.P., Appellee.

On appeal from the 253rd District Court

of Liberty County, Texas.

O P I N I O N

Before Justices Dorsey, Ya ez, and Wittig[1]

Opinion by Justice Wittig

In this oil and gas contract dispute, we review an operating agreement and determine whether certain development expenses are chargeable to the owners of the carried working interests. We hold the expenses are allowable, reverse the judgment below, and render judgment on behalf of appellant.

Gaither Petroleum Corporation, the lease operator, sued Hilcorp Energy I, L.P. Gaither sought, inter alia, a declaratory judgment that expenses it incurred for 3D Seismic surveying and the drilling of a new well were assessable to Hilcorp under the agreement binding the parties. Hilcorp countersued for declaratory judgment, conversion, and breach of contract. Both parties filed motions for summary judgment. After granting Hilcorp=s motion and denying Gaither=s, the trial court, upon the parties=request, severed the two declaratory judgment actions from all remaining claims, thereby permitting this appeal.

I

Gaither presents two distinct issues for review.[2] The first is a challenge to the trial court=s construction of the operating agreement. The second is an attack on the trial court=s ruling sustaining Hilcorp=s objection to course-of-dealing evidence submitted by Gaither. Because we sustain Gaither=s first issue and render judgment in its favor, the second issue is moot.

II

When we review cross-motions for summary judgment, we consider both motions and render the judgment that the trial court should have rendered. Coastal Liquids Transport, L.P. v. Harris Cty. Appraisal District, 46 S.W.3d 880, 883 (Tex. 2001). Because the propriety of a summary judgment is a question of law, we review the trial court=s decision de novo. Natividad v. Alexsis, Inc., 875 S.W.2d 695, 699 (Tex. 1994). Summary judgment should be granted if the movant establishes that there is no genuine issue of material fact and that he is entitled to judgment as a matter of law. Tex. R. Civ. P. 166a(c); Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 548 49 (Tex. 1985).

III

  Construction of the Operating Agreement

Though they reach opposite conclusions, both parties agree the terms of the operating agreement are unambiguous. Whether a contract is ambiguous is a question of law for the court to decide. Landry's Seafood Rests., Inc. v. Waterfront Caf , Inc., 49 S.W.3d 544, 549 (Tex. App.BAustin 2001, pet. dism=d) (citing Friendswood Dev. Co. v. McDade & Co., 926 S.W.2d 280, 282 (Tex. 1996)). A contract is ambiguous when its meaning is uncertain and doubtful or it is reasonably susceptible to more than one meaning. Lenape Resources Corp. v. Tennessee Gas Pipeline Co., 925 S.W.2d 565, 574 (Tex. 1996) (citing Coker v. Coker, 650 S.W.2d 391, 394 (Tex. 1983)). When a contract contains an ambiguity, the granting of a motion for summary judgment is improper because the interpretation of the instrument becomes a fact issue. K3 Enters. v. McDaniel, 8 S.W.3d 455, 458 (Tex. App.BWaco 2000, pet. denied) (citing Harris v. Rowe, 593 S.W.2d 303, 306 (Tex. 1979)). On the other hand, if a contract is worded in such a manner that it can be given a definite or certain legal meaning, then it is not ambiguous and its meaning should not be determined by a finder of fact. Lenape, 925 S.W.2d at 574.

1. Competing Conflicts Provisions

The contract between Hilcorp and Gaither consists of several documents, all of which were executed by the parties= predecessors-in-interest. The original operating agreement was executed in 1929. A formal amendment was executed in 1959, adopting new accounting procedures (PASO), produced by an industry trade group. In 1971, a letter agreement adopted a new set of accounting procedures, COPAS.[3]

In this appeal, our initial task is to ascertain how the two separate conflicts provisions in this group of documents work together. Section II of COPAS contains a pro forma conflicts provision which states:

In the event of a conflict between the provisions of this Accounting Procedure and the provisions of the agreement to which this Accounting Procedure is attached, the provisions of the agreement shall control.

Article one, section II of the 1959 amendment adopting PASO, but not PASO itself, also contains a conflicts provision. It states:

[T]he aforesaid Operating Agreement. . . is hereby amended. . . by adding thereto and incorporating therein. . . [the provisions of PASO]; hereby deleting and expunging from said Operating Agreement and/or prior amendments any and all provisions thereof which are in conflict with those hereby added thereto and incorporated therein.

Hilcorp contends the Aagreement@referenced in the conflicts provision of COPAS is the 1929 operating agreement, excluding the 1959 letter amendment. Gaither contends the Aagreement@ is the 1971 letter agreement itself, excluding the 1929 agreement. We disagree with both interpretations.

We have found no Texas case interpreting conflicts provisions in accounting procedures attached to oil and gas operating agreements. However, we should favor an interpretation that affords meaning to each part of the contract, in light of the surrounding circumstances, so that none is without consequence. R & P Enterprises v. LaGuarta, Gavrel & Kirk, 596 S.W.2d 517, 519 (Tex. 1980). Unless the two provisions in the agreement are necessarily contradictory, the parties are presumed to have intended each to accomplish some particular purpose. Woods v. Sims, 273 S.W.2d 617, 620 (1955).

Exclusion of the 1929 agreement in toto, following Gaither=s argument, would leave the parties with an AAccounting Procedure@ but nothing to account for. Hilcorp=s interpretation, on the other hand, is undermined by the language of the 1971 letter agreement itself. The 1971 letter states:

[Operator] currently operates. . . under the terms of an operating agreement dated April 1, 1929 as amended by the addition of the PASO-T-1955-2 Accounting Procedure in March 1959. . . .

We propose to convert to combined fixed rates and amend the agreement by substituting the attached COPAS-1962 Accounting Procedure for the PASO-Accounting Procedure now in effect.

The function of the 1971 amendment is, by its own terms, to substitute accounting procedures.[4] COPAS and PASO prominently and unambiguously identify themselves as accounting procedures. Crucially, the 1971 amendment does not supplant or otherwise alter the remainder of the 1959 amendment. See Southland Royalty Co. v. Pan American Petroleum Corp., 378 S.W.2d 50, 72 (1964) (enforcing plain terms of operating agreement). In particular, it does not alter the conflicts provision in the 1959 document.

It is true that COPAS refers to the 1971 letter agreement. The heading of COPAS begins with the following:

Attached to and made part of the Amendatory Letter Agreement Dated February 11, 1971, Hankamare Joint Block, Executed by Gulf Oil Company U.S., Amoco Production company and Mobile Oil Corporation.

We interpret COPAS=s reference to the 1971 agreement as only one link in a chain of connected documents. The 1971 amendment in turn refers to the 1959 and 1929 agreements which the 1971 agreement was intended to modify. Under this interpretation, the conflicts provision of the 1959 agreement provides that the terms of COPAS control over those of the 1929 agreement. Our interpretation of the conflicts provisions in COPAS and the 1959 agreement retains the most recent accounting procedure, COPAS, and annexes it to the existent oil and gas contract.

Unlike the suggestions of the parties, our interpretation gives meaning to both conflicts provisions and achieves a result consistent with the manifest, primary intent of the parties to develop an oil field.[5] See, e.g., K3 Enters. v. McDaniel, 8 S.W.3d 455, 458 (Tex. App.BWaco 2000, pet. denied) (court should consider all the documents comprising the contract in an effort to harmonize and give effect to every provision). See also Lenape, 925 S.W.2d at 574 (chief aim of contract interpretation is to ascertain the true intentions of the parties).

We have determined that the terms of COPAS, combined with non-conflicting terms from the 1929 agreement, define Gaither=s ability to charge various expenses. Our next task is to ascertain whether the particular seismic testing and well-drilling costs at issue are covered.

2. Permissible Expenses

The applicable contract language provides seismic expenses are chargeable under both COPAS and the 1929 agreement. We also determine COPAS allows charges against Hilcorp for the contested new well-drilling expense.

Article eleven, section II of COPAS contains the following catch-all provision covering charges to the joint account:

Subject to limitations hereinafter prescribed, operator shall charge the joint account with the following items: . . . 11. Any expenditure not covered or dealt with in the foregoing provisions of this Section II, or in Section III, and which is incurred by the Operator for the necessary and proper conduct of the Joint Operations.

Gaither=s summary judgment evidence included deposition testimony from Hilcorp=s designated corporate representative, Philip Hensarling. In his deposition, Hensarling admitted that seismic testing was Aprudent.@ This expense was therefore chargeable to Hilcorp under article eleven, section II of COPAS. Even if Hensarling=s testimony doesn=t demonstrate, as a matter of law, that the testing expenses were Anecessary and proper,@ as required to qualify under the COPAS catch-all,[6] we believe the seismic testing expenses are also unambiguously covered under the 1929 operating agreement as Alabor. . . services devoted exclusively to and performed upon@ the leasehold.

The 1929 agreement allows recoupment of costs, including development costs, out of production. Section 1 limits pre-production costs to $200,000. It further provides that after expenditure of $200,000, the first party, (Gaither=s predecessor-in-interest) is reimbursed Afor all expenses.@ The limitation of charges to the second party, Hilcorp, is initially $200,000, but after an intricate formula, the first party is allowed recoupment of all expenses, but only out of production. If there is no production, then there is no recoupment.

Section 2 (a) defines Aoperating expenses.@

(a) The cost, repair, upkeep and maintenance of all material, equipment and property of every kind devoted exclusively to the development of and used upon the land described (except drilling rigs) including employer=s liability and derrick insurance.

(b) The cost of all labor. . . .@

Thus operation expenses include costs, and repairs, of every kind allowed, so long as they are devoted exclusively to the development of, and used on, land in question. Likewise, costs of labor are explicitly covered.

Section 2 (g) limits personal liability to $50,000, Abut said one-fourth of the expenses and charges shall be borne by and deducted from the proceeds of the one-fourth@ of production. Thus, while Hilcorp has no personal liability, the expenses are chargeable to production.

Appellee argues Aexploration and development@ costs is a term of art. Notably, however, the term Aexploration@ is not used in the applicable provisions. Rather, initial costs for leasing and development (perhaps including exploration) are limited to $200,000 Cunless there is production. Thereafter, the second party=s one-fourth revenues are subject to deductions for all operating expenses, including development costs and labor.

Development costs are specifically included in section 2. Obtaining seismic data is clearly also a development cost. While modern, state-of-the-art 3D seismic testing may not have been strictly contemplated in 1929, various and unnamed costs that help generate income to the partners were contemplated. In fact, early seismic testing was used to develop this very field. Patently, we should not interpret the 1929 original portion of the agreement to exclude the use of computers, helicopters, thermography, state-of-the-art make-over rigs, and other modern implementations and devices not specifically named in 1929 original portion of the contract.

We also note that Section 7 of the original 1929 agreement grants Hilcorp title (one-fourth) to all tools, equipment, appliances, wells,[7] and Aall other property@ purchased for the joint account and paid for as provided. Once again, the agreement=s express intent contemplates proportional sharing of costs, and proportional title.

Hilcorp=s denial of the obligation to pay expenses for drilling the new well is arguable under the terms of the 1929 agreement. However, we have already noted, the terms of COPAS are valid and control over conflicting provisions in the 1929 agreement. Because drilling expenses are chargeable under COPAS, Gaither=s motion for summary judgment is sound and Hilcorp=s motion should have been denied. The same result obtains on the issue of seismic expenses, because such expenses are recoverable under both COPAS and the 1929 portion of the agreement. We sustain appellant=s first issue. Accordingly, the judgment below is reversed and we render judgment in favor of appellant.

DON WITTIG,

Retired Justice

Do not publish.

Tex. R. App. P. 47.3(b).

Opinion delivered and filed

this 22nd day of August, 2002.

[1] Retired Justice Don Wittig assigned to this Court by the Chief Justice of the Supreme Court of Texas pursuant to Tex. Gov=t Code Ann. '74.003 (Vernon 1998).

[2]Although Gaither=s brief identifies three issues, the second does not include any reference to legal authority. Moreover, we are unable to determine from the factual discussion presented, how, if at all, Gaither=s second issue is distinct from its first. If it is distinct, it is overruled. See Tex. R. App. P. 38.1(h) (requiring citation to proper authority).

[3]Although not material to this appeal, the parties= contract was amended by at least two other letter agreements executed in 1966 and 1969. We construe the agreement, as the sum total of the original contract, taken together with all additional, and still in force, amendments.

[4] PASO was attached as an exhibit to the1959 amending document.

[5]Hilcorp=s interpretation, for example, would imply the parties intended in 1971 to discard the modernized accounting methods of PASO in favor of terms and procedures in use over forty years earlier. This interpretation would lead to an illogical and unintended result.

[6] Hilcorp=s argument is based on contract language rather than sufficiency of the summary judgment proof.

[7] The granting of title to wells is problematic in the 1929 agreement. The saving provision of section 7, would be that if the second party didn=t pay, it would have no title. Happily for Hilcorp, because it was required to pay the drilling expense under COPAS, then should it not be entitled to its 25% title to the well?