CKB & Associates, Inc. v. Moore McCormack Petroleum, Inc.
| Decision Date | 23 April 1991 |
| Docket Number | No. 05-90-00289-CV,05-90-00289-CV |
| Citation | 809 S.W.2d 577 |
| Parties | CKB & ASSOCIATES, INC. and Charles E. Redwine, Appellants, v. MOORE McCORMACK PETROLEUM, INC., Appellee. |
| Court | Texas Court of Appeals |
William J. Burnett, Arthur Mitchell, Dallas (on appeal only), for appellants.
Rebecca P. Adams, James A. Ellis and Craig Weinlein, Dallas, for appellee.
Before STEWART, OVARD and BURNETT, JJ.
On Motion for Rehearing, our December 19, 1990 opinion is withdrawn. This is now the opinion of the court:
This is a summary judgment case. It is also the continuation of a nine-year dispute over an oil refining agreement. On January 8, 1990, the trial court entered final summary judgment for Moore McCormack Petroleum (MMP) on its breach of contract claim and awarded damages of $7,190,125.80, reduced by credits and offsets totalling $6,251,060.88. The trial court ordered CKB & Associates, Inc. (CKB) to pay a balance of $939,064.60, plus interest and attorneys' fees. CKB and MMP both appeal from the trial court's judgment. CKB argues that it did not breach its contract with MMP, that if it did breach the contract fact issues exist as to the proper measure of damages, and that the trial court used an erroneous legal standard in determining damages. MMP complains that CKB is not entitled to offsets against its claim and that the trial court erred in determining the proper amount of prejudgment interest to which MMP is entitled. MMP also contests each of CKB's points of error. We affirm the summary judgment on the question of CKB's liability for breach of contract. On the issue of damages, we modify the judgment of the trial court according to the analysis contained herein and affirm it. We also modify the trial court's award of prejudgment interest.
MMP sells refined petroleum products. In 1981, CKB bought a financially troubled oil refinery in Okmulgee, Oklahoma. With MMP's consent, CKB accepted assignment of a petroleum processing contract between MMP and the bankrupt refiner. By accepting the assignment, CKB agreed to refine for a ninety-day period 15,000 barrels per day of Oklahoma sweet crude supplied by MMP. The contract required CKB "to use its best efforts to process the crude oil into the volumes of refined products reflected on Exhibit "A," with variations not to exceed plus or minus one percent (1%) from the volumes reflected on Exhibit "A" for each product and from the total volume." 1
Exhibit "A" established the following targets for the refined products based on 15,000 barrels of crude:
LPG (liquified petroleum gas) 507 Barrels per day
Gasoline 6,128
JP"4 Jet Fuel 3,500
TF"Kerosene 1,000
No. 2 Distillate 3,105
No. 6 Fuel Oil 270
Flux 1,050
------
Total 15,560
The total exceeds 15,000 barrels because the refined products occupy a slightly greater volume than the original crude. MMP contracted to pay CKB a refining fee of $2.50 per barrel of crude.
The agreement imposed additional obligations on CKB. The company agreed to use its "best efforts" to help MMP market the production of JP-4 jet fuel. CKB also agreed to post letters of credit totalling $4 million to secure its performance under the contract.
CKB began processing crude oil under the contract in September 1981. Problems arose quickly. The Okmulgee refinery processed all of MMP's oil, but the volumes of refined products did not correspond to the schedule on Exhibit "A." Yields of JP-4 jet fuel (a high-priced product), LPG, and flux fell below the contracted target. Production of No. 6 fuel oil (a low-priced product), gasoline, kerosene, and No. 2 distillate exceeded contract quantities. On October 16, 1981, approximately one month into the production run, William Wicker, MMP's vice-president and general manager, notified CKB by letter that deliveries deviated from the contract targets. One month later, CKB's vice-president, Bill Harris, replied by letter that CKB did not believe the contract required it to hit any particular yield targets as long as CKB exercised "its good faith best efforts." MMP responded on November 18, 1981. Wicker complained that total volume delivered in October fell below the contract target and that again the refinery over-produced No. 6 fuel oil and flux and under-produced LPG and JP-4 jet fuel. 2 The letter warned CKB of liability if it failed to adjust the refinery yield. Wicker wrote twice more. The second letter, dated December 1, 1981, again complained of volume shortfalls and again warned that at the end of the contract period (December 20, 1981) CKB would have to make a financial adjustment "for the deficiency for product not received by MMP."
During the ninety-day contract period, CKB refined 1,358,273 barrels of MMP's crude oil. CKB significantly under-produced LPG, JP-4 jet fuel, and flux:
3. We derive 100% of contract yield merely by multiplying the Exhibit "A" daily targets for each refined product by 90 days, the length of the contract. CKB did not commit to hit 100% of contract yields, only to use its best efforts to produce the yields within a 1% tolerance above or below 100% of contract yield.
100% of Contract Actual Delivery % of Contract Yield
Yield 3
3 We derive 100% of contract yield merely by multiplying the Exhibit "A"
Note daily targets for each refined product by 90 days, the length of the
Note contract. CKB did not commit to hit 100% of contract yields, only to use its
Note best efforts to produce the yields within a 1% tolerance above or below 100%
Note of contract yield
LPG 45,910 25,540 55.63%
JP"4 316,930 172,913 54.56%
Flux 95,079 62,095 65.31%
CKB delivered a surplus of gasoline, kerosene, No. 2 distillate, and No. 6 fuel oil:
100% of Contract Yield Actual Delivery % of Contract Yield
Gasoline 554,900 570,161 102.75%
Kerosene 90,552 102,941 113.68%
No. 6 Fuel Oil 24,449 100,358 410.48%
No. 2 Distillate 281,163 329,540 117.21%
Despite the wide deviations from the contract targets, MMP accepted all products tendered.
CKB filed suit on December 17, 1981, to enjoin MMP from tapping the letters of credit which secured CKB's performance. Four days later MMP presented to the bank for payment three sight drafts totalling $3,602,530. CKB and MMP negotiated a partial settlement. CKB paid MMP $942,000 and ordered the bank to honor a sight draft for $1,658,590. MMP agreed to withdraw presentment of two sight drafts totalling $1,943,940. MMP also agreed to release CKB from any claims it might have concerning the quality of products delivered. The agreement left several claims unresolved. MMP retained the right to pursue claims for deficiencies in the volumes of the products delivered. CKB believed it retained the right to sue MMP for refund of the sight draft MMP drew down. CKB asserted that it owed MMP no more than the $942,000 which it had already paid, and it sued MMP for the refund. MMP argued that the partial settlement precluded CKB from contesting MMP's right to keep the proceeds of the sight draft. The litigation reached the Texas Supreme Court, which reversed summary judgment for MMP. The Supreme Court held that a fact question existed as to the meaning of the partial settlement agreement. CKB & Associates v. Moore McCormack Petroleum, Inc., 734 S.W.2d 653, 655-56 (Tex.1987).
While the letter of credit litigation proceeded through the appellate courts, MMP pursued its claims for volume deficiencies in the trial court. MMP argued that it suffered damages of $7,190,125.48 due to undershipment of JP-4 jet fuel, LPG, and flux. The JP-4 represented most of the claim. CKB contended that it owed nothing because the petroleum processing agreement required it only to use "best efforts" to hit within 1% of the contract figure. The agreement did not mandate any specific production figure. CKB also pleaded some variant of offset. (See discussion of MMP's first cross-point.) It pointed out that it had overproduced gasoline, kerosene, No. 6 fuel oil, and No. 2 distillate and that MMP accepted the benefit of the surplus. CKB argued that the court should reduce damages by the value of the surplus. CKB admitted the fair market values of the refined products in Okmulgee, Oklahoma, on the last day for delivery under the contract. MMP accepted the values for purposes of its interlocutory summary judgment motion:
$ Price per barrel
LPG 16.065
JP"4 Jet Fuel 42.42
Gasoline 39.69
Kerosene 41.79
No. 2 distillate 40.95
No. 6 fuel oil 24.85
Flux 22.85
The trial court granted MMP's motion for interlocutory summary judgment for damages due to volume deficiencies but credited CKB for the overproduction. The trial court found damages of $7,190,125.48, reduced by $4,592,470.78 in overproduction. The trial court further reduced MMP's award by $1,658,590 to reflect the draw on the letter of credit. The offset and the paid sight draft left a balance of $939,064.60. The interlocutory summary judgment became final on January 8, 1990. The trial court entered judgment for MMP in the amount of $939,064.40, plus attorneys' fees and prejudgment interest.
CKB and MMP both appeal from the trial court's judgment. CKB raises five points of error. The points make...
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