Apollo Exploration, LLC v. Apache Corp.

• Citation: 631 S.W.3d 502
• Decision Date: 10 June 2021
• Docket Number: No. 11-19-00183-CV,11-19-00183-CV
• Parties: APOLLO EXPLORATION, LLC; Cogent Exploration, Ltd., Co.; and SellmoCo, LLC, Appellants v. APACHE CORPORATION, Appellee
• Court: Court of Appeals of Texas

631 S.W.3d 502

APOLLO EXPLORATION, LLC; Cogent Exploration, Ltd., Co.; and SellmoCo, LLC, Appellants

v.APACHE CORPORATION, Appellee

No. 11-19-00183-CV

Court of Appeals of Texas, Eastland.

Opinion filed June 10, 2021

Bradley H. Bains, David W. Lauritzen, Midland, Patrick Zummo, Houston, Zona Jones, Beaumont, Jordan Havard, William G. Arnot III, Califf Cooper, Houston, Michael A. Havard, Beaumont, Louis K. Bonham, Houston, for Appellants.

Timothy S. McConn, Dori Kornfeld Goldman, Stephen B. Crain, Houston, Harper Estes, Midland, Douglas S. Griffith, Reagan W. Simpson, Andrew S. Friedberg, Robert D. Woods, Houston, Derek Cook, for Appellee.

Panel consists of: Bailey, C.J., Trotter, J., and Wright, S.C.J.¹

W. STACY TROTTER, JUSTICE

Apollo Exploration, LLC; Cogent Exploration, Ltd., Co.; and SellmoCo, LLC (collectively Appellants) and Gunn Oil Company owned 98% of the working interest in 109 oil and gas leases covering over 120,000 acres of land in the Texas Panhandle. On March 22, 2011, Appellants and Gunn Oil sold 75% of their interests to Appellee, Apache Corporation. To consummate this transaction, Appellants and Gunn Oil each executed a separate purchase and sale agreement (PSA) with Apache. Appellants subsequently sued Apache and alleged that Apache had failed to comply with the provisions of the PSAs; Appellants also asserted breach-of-contract and tort claims and requested declaratory relief.

As relevant to this appeal, Apache filed four motions to exclude Appellants' expert witnesses on damages and five motions for partial summary judgment. Based on the trial court's rulings on these motions, Apache eventually filed a no-evidence motion for partial summary judgment challenging Appellants' breach-of-contract and tort claims on the ground that Appellants could produce no evidence to support their claims for damages. The trial court granted Apache's motion and thereafter rendered a final judgment in which it incorporated its previous summary judgment rulings, ordered that Appellants take nothing on their claims, and awarded Apache $4,800,000 in attorneys' fees pursuant to the Texas Declaratory Judgments Act.

In four issues, Appellants assert that the trial court erred when it (1) granted, in whole or in part, Apache's six motions for summary judgment; (2) struck Appellants' three expert witnesses on damages; (3) awarded attorneys' fees to Apache; and (4) entered a final judgment based on the combination of its partial summary judgments and expert exclusion orders. We affirm in part, reverse in part, and remand this cause to the trial court for further proceedings.

I. Factual and Procedural Background

Appellants and Gunn Oil acquired a combined 98% working interest in 109 oil and gas leases covering over 120,000 acres in the Texas Panhandle. The lease for the Bivins Ranch accounted for approximately 100,000 of those acres. Appellants and Gunn Oil drilled a producing oil well on the Bivins Ranch and, under the terms of the Bivins Ranch lease, divided the lease into three equal blocks: the North Block, the South Block, and the East Block.

On March 22, 2011, Appellants and Gunn Oil sold 75% of their combined 98% working interest² in the 109 leases to Apache for approximately $338 per acre. Appellants and Gunn Oil each executed a separate PSA with Apache. Other than the identity of the defined "Seller," the interest conveyed, and the price paid, the substance of the four PSAs were identical. In this case, the majority of Appellants' claims are based on the parties' interpretations of Sections 2.5, 4.1, and 4.2 of the PSAs.

Pursuant to Section 2.5 of each PSA, the Seller, as defined in that PSA, had the right, but not the obligation, to "back-in" for up to one-third of the interest that was conveyed to Apache in the PSA at the "Back-In Trigger," which was defined as 200% of "Project Payout." In turn, "Project Payout" was defined as the first day of the month after certain defined revenue equaled certain defined costs. Each Seller also had the option, at any time, to back-in to the project by paying Apache "the remaining balance due for the Back-In Trigger." Additionally, pursuant to Section 4.2 of each PSA, Apache was required to provide the Seller with annual written payout statements that related to the status of the Project Payout and the Back-In Trigger.

In Section 4.1 of each PSA, Apache agreed that, on or before November 1 of each calendar year, it would conduct an annual review of the Assets, as defined in the PSA, and provide the Seller with a written budgeted drilling commitment for the upcoming calendar year. Apache agreed that it would make a good faith effort to comply with the written budgeted drilling commitment in order to perpetuate the "Leases," as defined in the PSA. However, if any written budgeted drilling commitment contemplated, or would result in, the loss or release of one or more of the Leases (or parts of those Leases), Apache was then required to "concurrently offer all of [Apache's] interest in the affected Leases (or parts thereof)" to the Seller at no cost to the Seller. If the Seller accepted the offered Leases, Apache was required to "transfer and assign the affected Leases (or parts thereof) to Seller."

In 2014, Apollo and Cogent sued Apache and requested a declaration of their rights under Section 2.5 of the PSAs. However, by the time that their fourth amended petition was filed in 2016, SellmoCo had been joined as a plaintiff and Appellants not only sought declaratory relief but alleged, generally, that Apache had breached the PSAs with Appellants and had committed various torts by failing (1) to provide written payout statements on an annual basis that showed the status of the Project Payout and the Back-In Trigger, (2) to provide written budgeted drilling commitments, (3) to offer to assign its interest in the affected Leases to Appellants, and (4) to correctly pay Appellants their share of the proceeds from the sale of oil and gas production.

Apache initially filed four motions for summary judgment and requested that the trial court construe the meaning of certain terms or provisions in the PSAs and in the Bivins Ranch lease. Specifically, Apache filed traditional motions for summary judgment in which it requested that the trial court construe (1) the meaning of "Back-In Trigger" in Section 2.5 of the PSAs, (2) the meaning of "Leases" and "affected Leases" in Section 4.1 of the PSAs, and (3) whether Apache was required under Section 4.1 of the PSAs to offer Appellants the portion of Apache's working interest that was originally owned by Gunn Oil. Apache also filed a combined traditional and no-evidence motion for summary judgment in which it requested that the trial court determine that the North Block lease expired on January 1, 2016, and a combined traditional and no-evidence motion for summary judgment in which it challenged Appellants' claims for fraud; breach of express trust, breach of fiduciary duty, and misapplication of fiduciary property; negligence; gross negligence; and conversion.

The trial court granted summary judgment in favor of Apache on Appellants' claims for breach of express trust, breach of fiduciary duty, and misapplication of fiduciary property.³ The trial court also granted summary judgment in Apache's favor on how to calculate the "Back-In Trigger," on the meaning of "affected Leases," and on how to account for the working interest originally owned by Gunn Oil. Finally, the trial court granted Apache's motion for summary judgment on the expiration date of the Bivins Ranch North Block lease and determined that the North Block lease expired on January 1, 2016.

Apache also sought to exclude the testimony of three expert witnesses that Appellants had designated to testify on damages. Paul Dee Patterson, Appellants' first expert witness, calculated damages by relying on the discounted cash flow methodology. Apache moved to exclude Patterson's testimony on the ground that his opinions were neither relevant nor reliable. Although the trial court granted Apache's motion to exclude Patterson's testimony, it did allow Appellants additional time to designate a new expert on damages.

Peter Huddleston, Appellants' second expert witness on damages, formulated his opinions of the fair market value of the leases based on comparable transactions. Approximately 90% of Huddleston's damage calculations were based on his opinion that the Bivins Ranch North Block lease expired on December 31, 2015, rather than January 1, 2016. Apache moved to exclude all of Huddleston's opinions; however, the trial court excluded only any testimony that Huddleston intended to offer that related to an expiration date for the North Block lease other than January 1, 2016.

Two weeks before the commencement of trial, Appellants produced an expert report from Dean Graves, Appellants' accounting expert, on the issue of damages. Apache moved to exclude Graves's "new opinions" on the ground that his opinions had not been timely disclosed. Apache also filed a second motion to exclude Huddleston's testimony on the ground that he had not revised his damage calculations following the trial court's summary judgment rulings on the expiration date of the North Block lease and on how to account for the working interest originally owned by Gunn Oil. In separate orders, the trial court granted both motions to exclude.

On the day that trial was scheduled to begin, Apache requested that the case be removed from the trial court's jury docket and that it be allowed to file a no-evidence motion for summary judgment to challenge Appellants' remaining breach-of-contract and tort claims on the ground that Appellants could produce no evidence of damages. Appellants did not oppose Apache's request. Apache filed, with leave of court, the no-evidence motion, and Appellants filed a response. The trial court subsequently granted the no-evidence motion for summary judgment. After Appellants nonsuited their remaining claims,⁴ the trial...