OMEGA ENERGY CORPORATION AND GASTON KEARBY v. GULF STATES PETROLEUM CORP.--Appeal from 94th District Court of Nueces County

NUMBER 13-03-275-CV

COURT OF APPEALS

THIRTEENTH DISTRICT OF TEXAS

CORPUS CHRISTI EDINBURG

OMEGA ENERGY CORP., Appellants,

v.

GULF STATES PETROLEUM CORP., Appellee.

On appeal from the 94th District Court

of Nueces County, Texas.

M E M O R A N D U M O P I N I O N

Before Chief Justice Valdez and Justices Hinojosa and Castillo

Opinion by Chief Justice Valdez

This case stems from a dispute over a contract to purchase a mineral lease. Appellant, Omega Energy Corporation, is appealing from the judgment of the trial court granting appellee, Gulf States Petroleum Corporation, damages in the amount of $44,891.04. We affirm.

I. Background

A. The Cody Lease Modifications

Omega was the lessor of a mineral lease known as the Cody Lease located in Nueces County, Texas. In 1998, Omega and Gulf States entered into a written contract for the purchase of the Cody Lease. Under the original terms of the contract, Gulf States was to pay Omega $400,000 in cash by November 15, 1998.

By November 5, ten days before performance was due, it had become clear that Gulf States would be unable to comply with the original agreement due to financial difficulties. The parties therefore entered into a written modification of the original agreement. Under the modification, Gulf States was to pay $150,000 by November 15 and the remaining $250,000 by December 15.

On November 14, one day before performance was due, Gulf States again notified Omega that it would be unable to comply. The parties again modified the agreement and delayed the date of the original payment to November 20, although the entire purchase stillwas to be made by December 15.

On December 15, having paid Omega only $150,000 of the purchase price, Gulf State failed to meet the deadline. In February 1999, the parties entered into another modification for the purchase of the lease. Gulf States agreed to pay bi-weekly installments of $10,000 until the remainder of the purchase price was met. Gulf States also agreed to pay an additional $30,000 by March 1, 1999; once this sum was paid, Gulf States would be entitled to commence workover on two currently inoperative wells located on the Cody lease property, denominated Cody #1 and Cody #2. Gulf States agreed to handle the workover on the wells solely at its own expense and using its best efforts to establish production. Between the date of the modification and the date Gulf States fully paid the purchase price of the lease, all revenues from the wells would be split evenly between Omega and Gulf States.

Gulf States failed to comply with the provisions of the February 1999 modification, and again negotiated a new modification of the contract with Omega in June 1999. This final modification stated that Gulf States would pay Omega $10,000 in order to commence workover on either of the two Cody wells. Again, any revenue from the wells would be split between the parties until the balance of the contract was fulfilled.

Following the June 1999 modification, Gulf States paid Omega $10,000 and commenced workover of the Cody #2 well. Michael Mitcham, Gulf States agent, also began preparing Cody #1 for production, although he claims this work never amounted to a complete workover requiring a second $10,000 payment.

B. The Stanford Agreement

The following year, Omega sold a group of mineral leases to a third party, Stanford Petroleum, pursuant to a contract known as the Stanford Agreement. This agreement did not include the Cody Lease. At this point a dispute arose between Gulf States and Omega regarding their remaining obligations to each other. Gulf States maintained that the June 1999 modification included a provision that entitled Gulf States to assume the Cody Lease without further payment to Omega once the Stanford Agreement was finalized, due to Gulf States assistance of Omega in procuring the buyer for the properties involved in the Stanford Agreement. Omega asserted that the Stanford Agreement had no effect on the parties under the June 1999 modification. //

Gulf States consequently abandoned work on the Cody wells, and Mitcham removed and sold pumping equipment from Cody #2 that belonged to Omega. Omega subsequently lost the Cody Lease. Omega alleges the leases lapsed due to their non-productive state. Gulf States then brought a breach of contract suit against Omega, alleging fraud, deceptive trade practices and conversion and demanding that Omega convey the Cody Lease to it without further payment. A trial was held, and at the close of evidence Gulf States for the first time asked for rescission of the contract. Omega objected to the request for rescission as it had not been raised as an issue in the pleadings. The trial court overruled Omega s objection.

The trial court found that Omega did not breach the agreement as modified. In its findings of fact and conclusions of law, the court determined that the parties had not agreed in the June 1999 modification that upon the signing of the Stanford Agreement, Gulf States was entitled to the Cody Lease without paying the remaining balance of the purchase price. The court concluded, No such meeting of the minds took place. The trial court also found that no issue had been tried by consent of the parties. Ultimately, however, the trial court found that Gulf States was entitled to $59,000, representing the amount Gulf States paid to third-party contractors working on the Cody #1 and #2 wells. The court characterized this as rescission damages because it would be inequitable for Gulf States to have paid this money having not been able to fulfill the terms of the contract to purchase the Cody Lease. The court also found that Omega was entitled to recover $14,108.96 from Gulf States, as damages incurred when Mitcham, acting as Gulf States agent, sold Omega s on-site equipment at Cody #2 without Omega s knowledge or permission.

Omega appealed the decision to this court, arguing that the trial court erred in entering judgment in favor of Gulf States. Specifically, Omega alleges (1) rescission was not properly before the trial court and therefore could not be the basis for judgment; and (2) had rescission been properly before the court, the trial court erred in concluding Gulf States was entitled to rescission for workover expenses. Gulf States cross-appealed, arguing that the trial court erred in finding that Omega did not breach the contract to convey the Cody Lease to Gulf States.

II. Rescission

A. Rescission as a Remedy

We first address the issue of rescission as an unpled issue. Omega argues in its first issue that because rescission had not been raised as an issue in the pleadings, Gulf States could not raise it at trial, and the trial court could not base its judgment on rescission. Gulf States argues in response that the damages awarded to it were based on funds expended on the real property, and not on rescission. However, because the trial court specifically and expressly noted that the damages were awarded on the basis of rescission, and because Gulf States itself raised rescission in its closing arguments at the trial, we disregard this argument and instead respond to Omega.

A trial court may not grant relief to a party in the absence of pleadings to support that relief. See Moreno v. Moore, 897 S.W.2d 439, 442 (Tex. App. Corpus Christi 1995, no writ); see also Tex. R. Civ. P. 301. However, Texas courts have traditionally construed pleadings liberally, and in the case of rescission specifically, at least one court has held that factual allegations in the petition, coupled with a prayer for general relief, are sufficient to support a decree granting rescission. Green Tree Acceptance, Inc. v. Pierce, 768 S.W.2d 416, 420 (Tex. App. Tyler 1989, no writ). Furthermore, when the claims and defenses raised are those which contemplate a particular remedy, a party may be entitled to that particular remedy despite a failure to specifically plead for such relief. See Perez v. Briercroft Serv. Corp., 809 S.W.2d 216, 218 (Tex. 1991).

Gulf States did not specifically request that it be granted rescission as an equitable remedy to Omega s alleged breach of contract. However, Gulf States did assert claims for damages based on fraud and violations of the Deceptive Trade Practices Act. Claims of fraud, if substantiated, will serve to vitiate a contract; rescission is a proper remedy that can be applied to a finding of fraud. See Fortune Prod. Co. v. Conoco, Inc., 52 S.W.3d 671, 676 (Tex. 2000). Rescission has also been found to be a proper remedy for claims based on the Deceptive Trade Practices Act. See David McDavid Pontiac, Inc. v. Nix, 681 S.W.2d 831, 835-36 (Tex. App. Dallas 1984, writ ref d n.r.e.). Therefore, because the claims raised by Gulf States in its pleadings could potentially be remedied by a judicial rescission of the contract, see Perez, 809 S.W.2d at 218, we do not find that the trial court improperly considered rescission as a remedy for Gulf States alleged injuries. Omega s first issue is accordingly overruled.

B. Propriety of Rescission-Based Damages

By its second issue, Omega argues that the trial court erred and abused its discretion in granting rescission damages to Gulf States. We have concluded that rescission was available as a potential remedy; we now must determine whether the granting of rescission was proper in these circumstances.

Rescission of a contract is an equitable remedy used as a substitute for monetary damages when such damages would not be adequate. Scott v. Sebree, 986 S.W.2d 364, 368 (Tex. App. Austin 1999, pet. denied). A plaintiff requesting rescission has the burden to prove that she is deserving of equitable relief and that there is no adequate remedy at law. Frost Bank v. Burge, 29 S.W.3d 580, 596 (Tex. App. Houston [14th Dist.] 2000, no pet.). A trial court must weigh several factors to determine if rescission should be granted, including probability of irreparable damage to the moving party, possibility of harm to the nonmoving party, and public interest. Davis v. Estridge, 85 S.W.3d 308, 310 (Tex. App. Tyler 2001, pet. denied). The trial court must also take into account equitable principles; for example, in the context of property, before a buyer may rescind a contract, she must give timely notice to the seller that the contract is being rescinded and must either return or offer to return the property received and the value of any benefit derived from its possession. Id. at 311 (citing David McDavid Pontiac, Inc. v. Nix, 681 S.W.2d 831, 836 (Tex. App. Dallas 1984, writ. ref d n.r.e.)). Generally a court will not enforce contractual rights in equity, because a party can rarely establish an irreparable injury and an inadequate legal remedy when damages for breach of contract are available. Butnaru v. Ford Motor Co., 84 S.W.3d 198, 211 (Tex. 2005).

An appellate court reviews a judgment granting rescission for an abuse of discretion. See Davis, 85 S.W.3d at 310. If the trial court abuses its discretion in ordering rescission, the resulting judgment must be reversed. Id.

Gulf States requested rescission because of its unilateral mistake regarding the contents and effect of the contract - specifically, the June 1999 modification. In order to be entitled to equitable relief on the grounds of unilateral mistake, a party must show (1) the mistake is of so great a consequence that to enforce the contract as made would be unconscionable; (2) the mistake relates to a material feature of the contract; (3) the mistake must have been made regardless of the exercise of ordinary care; and (4) the parties can be returned to status quo in the equity sense; i.e., rescission must not result in prejudice to the other party except for the loss of his bargain. N. Nat l Gas Co. v. Chisos Joint Venture I, 142 S.W.3d 447, 456 (Tex. App. El Paso 2004, no pet.).

At trial, Gulf States argued that the June 1999 contract modification was intended to provide that upon the closing of the Stanford Agreement, Gulf States was entitled to assume the Cody Lease without further payment to Omega. The trial court disagreed with this interpretation but nonetheless acknowledged that Gulf States had spent substantial amounts of time, effort and money in preparing the two Cody wells for production in anticipation of acquiring the lease and accordingly granted damages in rescission.

The June 1999 modification has no provision that would award Gulf States the Cody Lease without further payment of the purchase price upon the successful closing of the Stanford Agreement. At trial, Gulf States representative acknowledged that the modification did not reflect his intent, implying that he signed the contract by mistake, intending to agree to a different set of obligations. This mistake clearly relates to a material feature of the contract, i.e., Gulf States obligation to pay the remainder of the purchase price. These parties had an extensive history of dealing with each other and there was no evidence that Gulf States failed to exercise ordinary care in these dealings. See id. at 456. The trial court s order rescinding the contract attempted to place the parties back in status quo by returning to each the property that would not have been expended or lost by either party had there never been such a modification of the contract. While there was a lack of direct evidence to show enforcement of the modification would be unconscionable, see id., we are limited by the abuse of discretion standard of review, and may only overrule the trial court s decision if no reasonable evidence supports it. See Butnaru, 84 S.W.3d at 211.

The evidence establishes that both parties attempted to enter into binding contractual obligations and suffered from unmet expectations of those obligations, despite partial performance. Thus, we conclude the trial court did not abuse its discretion in rescinding the contract as some evidence does reasonably support its decision. See id.

We overrule Omega s second issue on appeal, and affirm the judgment of the trial court insofar as damages were granted on the basis of rescission.

III. Gulf States Cross-Appeal

Gulf States also filed its own cross-appeal, arguing that the trial court erred in finding that no contract existed, and therefore Gulf States was not entitled to damages from the breach of such contract. Gulf States argues on appeal that it is undisputed that the June 1999 modification made the contract contingent on the sale of certain leases under the Stanford Agreement, upon which [Gulf States] would owe no additional sums of money, and assignments would be made to [Gulf States] from [Omega] for the Cody Leases. Based on the existence of this undisputed contract, Gulf States insists it is entitled to damages.

Gulf States, however, failed to comply with the requirements of appellate briefs by omitting a clear and concise argument for the contentions made, with appropriate citations to authorities and to the record concerning this issue. Thus, Gulf States has waived its right to our review of this issue. See Tex. R. App. P. 38.1(h); Sunnyside Feedyard v. Metro Life Ins. Co., 106 S.W.3d 169, 173 (Tex. App. Amarillo 2003, no pet.).

Furthermore, a party cannot recover damages by both rescinding the contract to collect equitable damages and affirming the transaction to collect contract damages. See Swink v. Alesi, 999 S.W.2d 107, 111 (Tex. App. Houston [14th Dist.] 1999, no pet.); Hendon v. Glover, 761 S.W.2d 120, 122 (Tex. App. Beaumont 1988, writ denied). The party must elect a single remedy, through either affirming or rescinding the transaction. See Swink, 999 S.W.2d at 111. Gulf States request for equitable remedies at trial, coupled with its insistence upon the propriety of those damages on appeal, prevents us from evaluating its claim for damages based on breach of contract.

Accordingly, we cannot consider Gulf States issue on appeal. Based on Gulf States failure to comply with the rules of appellate procedure in briefing coupled with its failure to properly elect a remedy, we overrule its issue on appeal.

IV. Conclusion

We overrule both Omega s issues on appeal and Gulf States issue on cross-appeal. The judgment of the trial court is affirmed.

Rogelio Valdez,

Chief Justice

Memorandum Opinion delivered and filed

this 28th day of April, 2005.