Shell Offshore, Inc. v. Marr

• Decision Date: 09 November 1990
• Docket Number: No. 90-3040,90-3040
• Citation: 916 F.2d 1040
• Parties: SHELL OFFSHORE, INC., Plaintiff-Appellant, v. M.H. MARR, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1040

916 F.2d 1040

SHELL OFFSHORE, INC., Plaintiff-Appellant, v. M.H. MARR, Defendant-Appellee.

No. 90-3040.

United States Court of Appeals Fifth Circuit.

Nov. 9, 1990.

Rehearing Denied Dec. 4, 1990.

Judith Y. Robertson, John T. McMahon, New Orleans, La., for plaintiff-appellant.

David B. Klotz, Bodenheimer, Jones, Klotz & Simmons, Shreveport, La., Evan Marr Fogelman, Dallas, Tex., for defendant-appellee.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before REAVLEY, DUHE and WIENER, Circuit Judges.

WIENER, Circuit Judge:

Plaintiff-Appellant, Shell Offshore Inc. ("Shell") appeals the district court's grant of summary judgment in favor of Defendant-Appellee, M.H. Marr ("Marr") in Shell's diversity jurisdiction suit for a money judgment. Shell's claim against Marr is based on his purported anticipatory breach of a written loan agreement between the parties. We reverse the district court's determination that a provision in the subject agreement to the effect that Marr's indebtedness to Shell "shall be paid" from a share of Marr's working interest in certain gas wells constitutes an exclusive method for extinguishing the balance of that debt; and render judgment in favor of Shell and against Marr.

I.

In February, 1989, Shell filed a complaint against Marr in the United States District Court for the Eastern District of Louisiana, seeking payment of $4.305 million, the remaining balance on Shell's $6 million loan to Marr. In his answer Marr asserted that the repayment provision of the agreement provides the exclusive method of extinguishing the debt, obviating personal responsibility. In April, 1989, Marr filed a motion for summary judgment, and in October, 1989, Shell filed a counter motion for summary judgment. The parties executed a joint stipulation of facts regarding Marr's treatment of the transaction as a loan for purposes of federal income taxes. By judgment entered January 5, 1990, the district court denied Shell's motion for summary judgment and granted Marr's, dismissing this lawsuit. In so doing the district court held that Shell could only recover the sums owed on the Marr debt from one-half ( 1/2) of his share of production proceeds in certain gas wells in Mississippi. Shell appeals.

II.

The following facts are undisputed. Shell and Marr entered into a Joint Operating Agreement in 1971, in connection with co-working interests in the Southwest Piney Woods Field (the "Field") in Mississippi. Under the terms of the operating agreement, the Ridgeway No. 1 well was drilled in the Field and was tested in 1974 as having the largest delivery capacity of any well ever drilled in Mississippi. In order to develop and produce that discovery, Shell and Marr agreed to drill three more wells under the terms of the operating agreement. Those additional wells were the Stevens, the Clark, and the Edge wells (the three wells). Marr paid approximately $3 million as his share of the costs of drilling and completing the three wells. By the time they were completed it was apparent that there would be a substantial delay in producing those wells through Shell's Thomasville plant or other facilities then contemplated by Shell.

Marr voiced concern to Shell about the delay he would experience before receiving his share of the proceeds of production due to the delay in processing his gas through Shell's facilities. ¹ In light of the postponement of production during the time required to build new plant facilities for processing the gas, and the resulting delay in providing an income stream to Marr, Shell proposed a so-called "purchase and buy-back" arrangement involving a production payment from a portion of Marr's share of the eventual proceeds of production from the three wells. Complaining about possible tax disadvantages, Marr counterproposed that Shell lend him the money. On November 5, 1980, Shell responded in writing and offered to make such a loan to Marr. Shell's November 5th letter stated: "Collateral for this loan will be one-half ( 1/2) of your interest in the three wells. When the wells are placed on production, you will repay the loan out of one-half of the proceeds realized from your interest in the well." (emphasis added)

On November 12, 1980, Marr wrote to Shell stating, "The basic arrangement set forth in your letter of November 5, 1980, is satisfactory.... Therefore we request the initial loan...."

In an intra-company memorandum, Shell's Production Department characterized the proposed transaction as follows: "Attached are our letter of November 5, 1980, to Mr. M.H. Marr and his reply of November 12, 1980, which letters set forth the terms of a loan Shell will make to Marr Company. The letters are self-explanatory but following are the salient features of the loan.... (4) Collateral for the loan will be one-half Marr's interest in the three wells. When the wells are placed on production, the loan will be repaid out of one-half of the proceeds realized from Marr's interest in the well." (emphasis added) On December 19, 1980, Shell's management in Houston concurred in the loan approach: "Further to discussions with our staff, we concur with your plan to utilize the loan approach."

Significantly, Marr prepared the initial draft of the agreement "implementing our understanding" and sent it to Shell. Marr's draft contained a provision that "Any unextinguished balance may be paid by Marr in cash." Shell changed that provision to an option for Marr to prepay in cash. That provision in the executed agreement states: "Marr retains the option to prepay and fully extinguish the balance of this indebtedness in cash at any time." The final version of the agreement (the "Agreement") executed by the parties is relatively short, and is reproduced in its entirety as Appendix A. The collateral assignment (the "Assignment") executed by Marr on January 1, 1981, and reproduced in its entirety as Appendix B, was acknowledged by him in Dallas, Texas, on that date. The Assignment refers to the Agreement as "the agreement dated this same date by and between M.H. Marr and Shell Oil Company. ²

There is evidence that both Shell and Marr, each experienced and sophisticated oil and gas explorers and producers, fully expected the indebtedness to be repaid from one-half of Marr's share of the proceeds of production from the three wells. There is also evidence that subsequent to the consummation of the loan the "world gas market was in a state of collapse," with the price of natural gas dropping from approximately $7.00 per mcf at the time the agreement was executed to $1.53 per mcf as of March, 1989. As a result, the value of the remaining reserves and the anticipated lives of the two remaining wells were such that one-half of Marr's share of proceeds of production could never repay more than a small fraction of the remaining indebtedness.

In July, 1984, Shell approached Marr about repayment of the balance of the debt. At that time Marr indicated he preferred to postpone such action and watch the gas market. Marr stated that he "had never made a penny at the expense of his partners and he did not plan to do so with Shell." From that representation, Shell personnel inferred that Marr intended to pay the debt in full. A similar inquiry was met with a similar reassurance in the spring of 1985, and yet again on February 20, 1987. Because of increasing doubts about Marr's true intentions, however, Shell wrote to Marr in April, 1987, requesting a resolution of the matter. Hearing nothing, Shell wrote to Marr again in July of 1988, noting the impossibility of ever recovering the loan from production and requesting that Marr state the method by which he intended to repay the balance of the debt. Marr did not respond to that letter either, so Shell placed a telephone call to Marr on August 29, 1988, during which, for the first time, Marr changed his position, denying that the $6 million advanced by Shell was a loan and classifying it as a "production payment deal." In that conversation and in his own handwritten notes about it, Marr confirmed that he had "no intention of doing anything," taking the position that Shell had made "the error of over-estimating the reserves behind the advancements of oil pmts. & agn."

It is also undisputed that Shell paid $4.5 million to Marr in 1981, under the terms of the Agreement, and paid him an additional $1.5 million in 1982; and that for income tax purposes Marr did not report any portion of the $6 million as income in 1981 or 1982.

III.

A.

This court reviews the grant of summary judgment motion de novo, using the same criteria used by the district court in the first instance. Walker v. Sears, Roebuck & Co., 853 F.2d 355, 358 (5th Cir.1988). We "review the evidence and inferences to be drawn therefrom in the light most favorable to the non-moving party." Baton Rouge Bldg. & Constr. Trades Council v. Jacobs Constructors, Inc., 804 F.2d 879, 881 (5th Cir.1986) (per curiam) (citing Southmark Properties v. Charles House Corp. 742 F.2d 862, 873 (5th Cir.1984)). Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). A dispute about a material fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). "Material facts" are "facts that might affect the outcome of the suit under the governing law." Id.

B.

Although Marr, in the district court and in his brief to this court, continued to assert that the transaction covered by the Agreement and the Assignment was not a loan but was a production payment sale of his interest in the three wells, he abandoned that contention...