ABRAXAS PETROLEUM v. HORNBURG, 08-98-00286-CV

• Citation: 20 S.W.3d 741
• Decision Date: 16 March 2000
• Docket Number: No. 08-98-00286-CV,08-98-00286-CV
• Parties: (Tex.App.-El Paso 2000) ABRAXAS PETROLEUM CORPORATION, and ABRAXAS PRODUCTION CORPORATION, Appellants, v. JOHN H. HORNBURG and GWENDOLYN HORNBURG HAUTER, and MARIAN C. GUIBERSON, Appellees
• Court: Court of Appeals of Texas

Page 741

20 S.W.3d 741 (Tex.App.-El Paso 2000)

ABRAXAS PETROLEUM CORPORATION, and ABRAXAS PRODUCTION CORPORATION, Appellants, v. JOHN H. HORNBURG and GWENDOLYN HORNBURG HAUTER, and MARIAN C. GUIBERSON, Appellees.

No. 08-98-00286-CV

COURT OF APPEALS, EIGHTH DISTRICT OF TEXAS

EL PASO, TEXAS

March 16, 2000

Appeal from 142nd District Court of Midland County, Texas (TC# A-40,558) [Copyrighted Material Omitted]

[Copyrighted Material Omitted]

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Before Panel No. 1: Larsen, McClure, and Chew, JJ.

OPINION

ANN CRAWFORD McCLURE, Justice

Abraxas Petroleum Corporation (Abraxas) appeals from judgment entered in favor of Appellees, John H. Hornburg (Hornburg), Gwendolyn Hornburg Hauter (Hauter), and Marian C. Guiberson (Guiberson). We delete the award of exemplary damages and affirm the judgment as modified.

FACTUAL SUMMARY

The Cleo Smith lease, located in Stonewall County, and a Joint Operating Agreement (JOA) dated August 1, 1984 are at the heart of this dispute. The Cleo Smith lease had been in continuous production since 1952 and by all accounts had been prolific, having produced 1.6 million barrels of oil by 1992. The lease had four producing wells and its own saltwater disposal well. The parties to the JOA are:

- Pearson-Sibert Oil Company (55.357120 percent working interest);

- Charles H. Hornburg, Jr. (33.333330 percent working interest);

- Marion C. Guiberson (8.333350 percent working interest);

- Amcan Oil Producers (1.488100 percent working interest); and

- Robert D. Fitting (1.488100 percent working interest).¹ Guiberson obtained her one-twelfth interest in the lease sometime in the 1950s. Similarly, Charles Hornburg, Jr. had owned his one-third working interest in the lease since 1952 when it began production. Following Charles Hornburg, Jr.'s death in 1990, Hornburg and Hauter inherited equal shares of that one-third working interest in the lease. From 1952 until the fall of 1992, Pearson-Sibert, with active participation by Fitting, operated the Cleo Smith lease to the apparent satisfaction of all parties.

Despite having been in production for over four decades, the lease was still producing over 1,000 barrels of oil per month when Abraxas purchased Pearson-Sibert's interest and took over operations of the lease on September 1, 1992 pursuant to an assignment of the JOA. Within months, lease operating expenses escalated and oil production dwindled due to increased downtime for the four producing wells. Upset at this turn of events, Hornburg, on behalf of himself, Hauter, and Guiberson, contacted Abraxas in September 1993 regarding purchase of their interests by Abraxas. When he received no response after several weeks, Hornburg called Abraxas and spoke with its president, Robert L.G. Watson. Watson told Hornburg that he would get back to him within a week with an offer to purchase their interests. At about this same time, Hornburg received a joint interest billing statement from Abraxas for work performed during October of 1993. The expenses for that month totaled $43,450.88 and Hornburg's and Hauter's share of the expenses came to $7,278.33 each. Neither Hornburg nor Hauter paid this bill. When Watson did not follow through on his promise, Hornburg wrote Watson a second letter, dated November 23, 1993, inquiring not only about a possible purchase of their interests, but also requesting a copy of the JOA and an explanation of why expenses had risen so drastically while revenues had decreased. Shortly after Hornburg mailed this letter, Abraxas wrote the working interest owners and informed them that all production had ceased on the four producing wells because the number one well had parted rods, the numbers three and four wells had holes in the tubing, and number two had holes in the casing. Abraxas included in the AFE letter² a description of proposed workover procedures to restore the wells to production together with a cost estimate for each well. Although none of the jobs for the individual wells exceeded $30,000, the estimated costs to restore production for all four wells totaled $44,250. The letter warned that the number two well would require plugging for abandonment if the casing repair were not performed. If the working interest owners participated in the project, they would be required to pay their proportionate share of the expenses. On the other hand, if they declined to consent, their income from the lease would be paid over to Abraxas until they had paid 300 percent of their proportionate share of the proposed workover operations. Abraxas informed the working interest owners that, pursuant to the JOA, they had thirty days in which to make their election.

A few days later, Hornburg received a letter from Stephen T. Wendel, vice president of land and marketing at Abraxas, dated December 2, 1993. Wendel wrote the letter in response to Hornburg's letter of November 23, 1993. In addition to providing Hornburg with a copy of the JOA as requested, Wendel informed him that circumstances had changed greatly since Abraxas had assumed operation of the lease in October 1992. He stated that a number of casing leaks on the wells had been discovered and that significant sums of money had been expended by Abraxas to maintain or restore production.³ While reminding Hornburg of the AFE letter and the proposed workover operations, Wendel wrote that it was difficult to project the future performance of the lease since a risk existed that the casing leaks could not be repaired. Consequently, Wendel proposed that it assume Hornburg's interest in the property effective November 1, 1993 in order to eliminate his future risks and obligations. Stunned by the proposal, Hornburg directed no response to Abraxas but instead contacted Fitting, who had served as an advisor to him and his family for many years. Fitting subsequently wrote to Abraxas on behalf of himself and the other working interest owners and challenged not only its status as operator under the JOA, since it had never been formally selected as operator following its purchase of Pearson-Sibert's interest, but also its authority to send the AFE letter since none of the proposed single projects exceeded $30,000. Abraxas disregarded these complaints.

When none of the working interest owners elected within the thirty-day window to proceed with the workover operations, Abraxas deemed their status to be "non-consent" under the JOA as of December 1, 1993 and it began appropriating their future "runs," that is, the income from the sale of oil produced on the lease. Of the proposed workover operations, Abraxas actually performed only one small project in December 1993 at a cost of approximately $7,500, but it did not notify any of the working interest owners that it had decided not to complete the proposed operations. During the first seven months of 1994, only the number four well remained in production. In the latter portion of the year, the number three and four wells produced sporadically but after the disposal well went down in September with a hole in the tubing,⁴ Abraxas made the decision to shut down the lease and produce only one barrel from one well per day each month in order to hold the lease. Consequently, the lease was reduced from a1,000-barrel-per-month producer when Abraxas obtained the lease to producing only thirty barrels or less per month.

On September 7, 1994, Abraxas, through counsel, made demand on Hornburg for past due operating expenses in the sum of $8,727.69. Hornburg disputed the amount of the bill and obtained counsel. Hornburg and Hauter filed suit alleging, among other things, negligence, gross negligence, willful misconduct, breach of contract, and waste. Abraxas counterclaimed against both Hauter and Hornburg with a suit on sworn account, seeking to collect the lease operating expenses which had not been paid. The counterclaim also alleged a breach of contract action and sought attorney's fees. Abraxas later amended its counterclaim to request a declaratory judgment and attorney's fees pursuant to TEX.CIV.PRAC.&REM.CODE ANN. 37.009 (Vernon 1997), and by means of a third-party petition, it subsequently included Guiberson and the other working interest owners as third-party defendants to the declaratory judgment action. In response, Guiberson counterclaimed, asserting tortious interference with a contract, conversion, negligence and gross negligence waste, and breach of the operating agreement.

At trial, the court determined that Abraxas had never been formally selected as operator pursuant to the provisions of the JOA. The court submitted to the jury issues pertaining to whether Abraxas had committed waste, whether it complied with the JOA in sending the AFE letter, and whether it had substantially performed the work it had proposed. The jury found that Abraxas:

- was grossly negligent in committing waste, but did not engage in willful misconduct;

- breached the JOA by sending the AFE letter and by failing to perform all or substantially all of the work proposed under the AFE letter; and

- engaged in willful misconduct or gross negligence in failing to perform the work proposed under the AFE letter.

The jury further found that Abraxas' conduct proximately caused damages to Appellees, and that Abraxas was not entitled to an offset for reasonable and necessary expenditures on the Cleo Smith lease. In a bifurcated proceeding, the jury also assessed an award of exemplary damages in favor of Appellees. Based upon the jury's verdict and the partial remittiturs of the Appellees, the trial court entered judgment in favor of Hornburg and Hauter for actual damages in the amount of $65,740 each, and in favor of Guiberson in the amount of $32,870. Exemplary damages were awarded in the sums of $262,960 for Hornburg, $262,960 for Hauter, and $200,000 for Guiberson. The court also entered judgment that Abraxas take nothing on its counterclaims. Finally, the judgment...