Cass v. Stephens

• Decision Date: 31 August 2004
• Docket Number: No. 08-97-00582-CV.,08-97-00582-CV.
• Parties: Frank W. CASS and Michael L. Cass, Appellants, v. Patricia Love STEPHENS, Individually and as Trustee of the Walter H. Stephens Trust, the SSH Trust, the Sutton Elizabeth Stephens Irrevocable Trust, and the Heather Love Stephens Irrevocable Trust, Appellees.
• Court: Texas Court of Appeals

156 S.W.3d 38

Frank W. CASS and Michael L. Cass, Appellants, v. Patricia Love STEPHENS, Individually and as Trustee of the Walter H. Stephens Trust, the SSH Trust, the Sutton Elizabeth Stephens Irrevocable Trust, and the Heather Love Stephens Irrevocable Trust, Appellees.

No. 08-97-00582-CV.

Court of Appeals of Texas, El Paso.

August 31, 2004.

Rehearings Overruled October 13, 2004.

Gregory K. Ackels, Marc S. Culp, Kolody Thomas & Blackwood, Dallas, for Appellants.

John A. "Jad" Davis, Turner & Davis, Midland, for Appellees.

Before Panel No. 3 BARAJAS, C.J., LARSEN, and CHEW, JJ.

OPINION

DAVID WELLINGTON CHEW, Justice.

This is an oil and gas accounting case. Plaintiffs, Patricia Love Stephens, individually and as Trustee of the Walter H. Stephens Trust, the SSH Trust, the Sutton Elizabeth Stephens Irrevocable Trust, and the Heather Love Stephens Irrevocable Trust (collectively "stephens"), were working interest owners of certain oil and gas wells operated by the defendants Frank W. Cass, individually and d/b/a Cass Oil Company, Michael L. Cass, William G. Cass, and Cass Oil Company, Inc. Stephens sued the Cass defendants for breach of contract, conversion, and fraud. The Casses counterclaimed for breach of contract and defamation. A jury returned findings in favor of Stephens, finding Frank Cass, individually, liable for breach of contract, conversion, and fraud, and finding Michael Cass liable for conversion. The jury found against the Cass defendants on their counterclaims. The trial court entered judgment on the jury's verdict. On appeal, Frank and Michael Cass raise numerous points of error attacking the testimony of Stephens' expert witness, the legal and factual sufficiency of the evidence to support the jury's findings, and the trial court's imposition of sanctions for discovery abuses. We affirm and reform.

SUMMARY OF THE EVIDENCE

In 1970, General Walter H. Stephens and Frank W. Cass formed an operating partnership known as Stephens & Cass. The partnership operated properties which General Stephens and Frank Cass acquired individually. From 1970 to 1977, the partnership successfully drilled and operated approximately sixty to seventy wells located in Reagan, Upton, Glassock, and Midland Counties.

In 1974, General Stephens' health began to decline. He suffered a broken hip and had to have surgery. Over the next two years, he had three more surgeries on his hip and eventually had to have his hip replaced. It appears that during this period, General Stephens was not able to meaningfully participate in the daily activities of the partnership. By late 1977, Frank Cass desired to terminate his relationship with General Stephens and bring his son Michael L. Cass into the business.

On October 1, 1977, General Stephens and Frank Cass entered into an "Agreement to Terminate" the partnership. By this agreement, the two men agreed to wind up the business by January 1, 1978. They further agreed: to notify all of the other joint interest owners that Stephens & Cass had agreed to terminate their obligation as operator under the joint operating agreements ("JOAs"); that Mr. Cass would attempt to succeed the partnership as operator; that if Mr. Cass succeeded in obtaining the necessary votes under the JOAs, he would continue to operate the wells pursuant to the existing agreements; that Stephens & Cass would marshal and inventory all personal property owned by the partnership so that it could be valued; and finally that the records of Stephens & Cass would remain the property of both men and would be available to either one as required.

Pursuant to the foregoing agreement and the various JOAs, formal written ballots were administered, and Mr. Cass was elected operator by a majority-in-interest of the well owners. On January 1, 1978, Mr. Cass and the General entered into a new operating agreement recognizing that Mr. Cass had been elected operator. In 1980, Mr. Cass and General Stephens reached an agreement and assigned values to the personal property which they jointly owned.

In January of 1979, the General slipped on a patch of ice outside his home and suffered a broken back. The General's wife, Patricia Stephens, took him to the hospital. Apparently, he became over-medicated and slipped into a coma while at the hospital. His air supply was cut off for a period of time. The General eventually recovered, but developed a condition known as Pickwickian Syndrome which caused him to sleep excessively. Mrs. Stephens testified that her husband slept almost twenty hours a day from 1979 until his death in 1984. During this time, the General was unable to handle the vast majority of his financial affairs. Mrs. Stephens helped pay bills, but she testified that much of her husband's mail went unopened and that he failed to pay taxes for three years before his death.

After he became operator of the jointly-owned wells, Frank Cass threatened to resign on a number of occasions. He did so because he was discouraged by the working interest owners' failure to timely pay their monthly joint interest bills ("JIBs"). Mr. Cass related that he was being forced to put up his own money to pay vendors of the wells, and was losing money as the operator. In 1979, he sent a letter to all working interest owners stating that he was resigning as operator under the JOAs. The JOAs allowed an operator to resign, stating that all parties to the contract shall select by majority vote in interest a new operator. Nothing more was done or said about Mr. Cass's resignation and he continued to operate the wells for another three years. In 1982, Mr. Cass sent a letter notifying the working interest owners that he was changing the operator's name from his own to Cass Oil Company, Inc. From that point forward, all the working interest owners made their checks payable to Cass Oil Company, Inc., instead of Frank Cass.

On November 14, 1983, Mr. Cass purchased certain undeveloped lease-hold acreage from General Stephens. These undrilled locations were on the same leases as the jointly-owned wells ("the Stephens wells") and were direct offsets to them. The General passed away a few months after he executed those assignments. After the General died, his properties passed to Mrs. Stephens, the Walter H. Stephens Trust, the SSH Trust, the Sutton Elizabeth Stephens Irrevocable Trust, and the Heather Love Stephens Irrevocable Trust. In 1984, solely-owned Cass wells were drilled on the offset locations ("the Cass companion wells").

In March of 1986, Mr. Cass sent Mrs. Stephens a letter proposing to shut in twenty-six of the Stephens' wells. Mrs. Stephens contacted Bob Franklin, an engineer who had appraised the wells for estate tax purposes following the General's death. Based on Mr. Franklin's advice, Mrs. Stephens wrote a letter asking Mr. Cass to show on a lease-by-lease basis how the leases would be held without production. In response, Mr. Cass called Mrs. Stephens and allegedly became very belligerent. Mrs. Stephens related that her conversation with Mr. Cass lasted for three hours, and that he was evasive and insulting. He told Mrs. Stephens that she did not know what she was talking about and neither did her engineer, her CPA, or her estate attorney.

Concerned that Mr. Cass was withholding information, Mrs. Stephens hired Gruy Petroleum Management Company ("gruy") to conduct an audit of the revenue and expenses of the jointly-owned wells ("the Gruy audit"). She also hired a private investigator who recommended that she conduct a "trash cover" — a routine pick up of Cass Oil Company's trash. The Gruy audit resulted in separate reports for revenue and expenses. The audit was limited in scope and time; it covered revenue and expenses from 1984 to 1986. It reported major discrepancies, $2.9 million in expense exceptions and $9 million in revenue exceptions.

Pretrial Matters

Mrs. Stephens received the reports from Gruy in September of 1986. She then mailed copies to other working interest owners who had a financial stake in the wells. Mrs. Stephens filed suit against the Casses on November 4, 1986. Her petition alleged among other things that the Casses had breached the JOAs, converted jointly-owned property, and committed fraud. The Casses answered, denied the allegations, and counterclaimed against Mrs. Stephens for failure to pay her joint interest bills.

The first 1,000 pages of the clerk's record reflect a long and tortuous discovery battle. In July 1987, Stephens filed her first discovery request, seeking production of numerous documents. Over the ensuing months, a number of discovery hearings were held by the court and several orders were entered to compel discovery. Over the period from the actual commencement of discovery until May 1988, Cass produced and Stephens copied approximately 200,000 documents. In January 1988, Stephens filed a motion to compel further production and prevent destruction of documents. Also in January, Cass amended their answer asserting new and additional counterclaims against Stephens and against Gruy, which was impleaded as a third-party defendant. Damages were sought against Stephens and against Gruy, for negligently or intentionally conducting an improper audit and publishing a false report.

In May 1988, a hearing was held on various motions for protective orders. There it was revealed for the first time that Stephens, through her investigators, had recovered between 150,000 to 200,000 documents from Cass Oil Company's trash. The "trash cover" testimony indicated that Mr. Cass had been systematically discarding potentially discoverable documents both before and after the filing of the lawsuit. Entire original files were thrown out, including the pump installation and well development files which were necessary to audit the joint interest accounts and to trace the movement of jointly-owned equipment. Mr. Cass even tore up and discarded the only signed copy of the original operating agreement.

In June of 198...