Cone v. Fagadau Energy Corp.

• Decision Date: 20 December 2001
• Docket Number: No. 1-00-00003-CV.,1-00-00003-CV.
• Citation: 68 S.W.3d 147
• Parties: Kenneth G. CONE Appellant v. FAGADAU ENERGY CORPORATION and Sanford P. Fagadau Appellees
• Court: Texas Court of Appeals

68 S.W.3d 147

Kenneth G. CONE Appellant v. FAGADAU ENERGY CORPORATION and Sanford P. Fagadau Appellees

No. 1-00-00003-CV.

Court of Appeals of Texas, Eastland.

December 20, 2001.

Rehearing Overruled February 28, 2002.

Michael J. Canon, Canon & Gaston, Midland, Zollie C. Steakley, Rod E. Wetsel, Steakley & Wetsel, Sweetwater, for appellant.

Jim Hund, Murchison, Hund & Herriger, Ralph H. Brock, Lubbock, Dana Cooley, Dist. Atty., Snyder, for appellees.

Panel consists of: ARNOT, C.J., and WRIGHT, J., and McCALL, J.

Opinion

ARNOT, Chief Justice.

This appeal involves a dispute between parties to an operating agreement executed for the joint operation of a group of oil and gas leases covering approximately 850 acres located in Borden County. Fagadau Energy Corporation (FEC) was the operator of the leases under the operating agreement. Kenneth G. Cone (Cone) was a working interest owner of the leases and a party to the operating agreement. Sanford P. Fagadau (Fagadau) was the president and sole shareholder of FEC. FEC proposed the institution of a water flood program in the mid-1990s for the purpose of obtaining secondary recovery of hydrocarbons from the contract area covered by the operating agreement. FEC also proposed that the contract area be unitized in conjunction with the water flood program. FEC projected a capital cost of approximately $950,000.00 for the installation of the water flood. All of the working interest owners agreed to the water flood and unitization except Cone. Despite Cone's nonparticipation, FEC proceeded with the installation of the water flood and unitization after obtaining approval from the Railroad Commission of Texas. The record reflects that production from the unit increased significantly as a result of the water flood.

Litigation ensued soon after the installation of the water flood. Cone took exception to various charges made to his account by FEC as production expenses. Cone believed that the charges were improperly assessed to his account in light of his nonparticipation in the water flood. FEC initially filed suit against Cone to obtain a determination of Cone's liability for the payment of the disputed charges. Cone responded by asserting several counterclaims against FEC. Cone also sought to impose personal liability against Fagadau for the claims asserted against FEC.

The majority of the parties' contentions were determined prior to trial by summary judgment and by the granting of special exceptions in FEC's favor. The few remaining issues were decided after a bench trial. Cone appeals each of these adverse rulings by asserting 15 points of error. Cone complains of the trial court's entry of partial summary judgment in his first point of error. His second point of error attacks the granting of a special exception. His third, fourth, fifth, sixth, seventh, eighth, ninth, and tenth points of error attack the trial court's granting FEC's no-evidence motion for summary judgment. These points of error are comprised of numerous subparts, many of which are repetitious. Cone's eleventh point of error consists of four subparts which attack the trial court's no-evidence determination regarding Fagadau's personal liability. Cone's twelfth and thirteenth points of error attack the sufficiency of the evidence to support the trial court's judgment. His fourteenth point of error attacks the imposition of TEX.R.CIV.P. 13 sanctions by the trial court. Cone's fifteenth point of error addresses the awarding of attorney's fees by the trial court. We affirm in part, reverse and render in part, and reverse and remand in part.

The resolution of this appeal requires this court to interpret the parties' operating agreement. The operating agreement was prepared on a form promulgated by the American Association of Petroleum Landmen referred to as the A.A.P.L. Form 610-1982 MODEL FORM OPERATING AGREEMENT. Specifically, this appeal asks the court to interpret the terms of the operating agreement with respect to the following questions: I. Did the conversion of a producing well into an injection well constitute an abandonment of that well? II. Are a non-operator's causes of action against the operator for violations of the operating agreement limited only to actions of gross negligence or willful misconduct? III. Must the operator receive consent from all of the non-operators before installing a water flood?

This appeal also involves questions of the sufficiency of the evidence. These additional questions include: IV. Was Cone's evidence of liability and damages sufficient? V. Did FEC convert Cone's property by withholding Cone's proceeds? VI. Were the sanctions and attorney's fees awarded by the court supported in law and fact? and VII. What is the personal liability of Fagadau, the president of FEC, the operator of the property?

I. Did the conversion of a producing well into an injection well constitute an abandonment of that well?

Cone complains in his first point of error of the trial court's entry of partial summary judgment regarding the conversion of producing wells into water injection wells. The producing wells were converted into injection wells for the purpose of instituting the water flood.¹ Cone contends that the conversion of the wells constituted abandonment under the terms of the operating agreement such that Cone should have been offered the right to assume control of the wells. Early in the proceedings, the trial court granted FEC's motion for partial summary judgment by ruling that the conversion of the wells did not constitute abandonment under the terms of the operating agreement. Because the construction of a document is a matter of law, we review the trial court's construction of the operating agreement on a de novo basis. See Matter of Humphreys, 880 S.W.2d 402, 404 (Tex.), cert. den'd, 513 U.S. 964, 115 S.Ct. 427, 130 L.Ed.2d 340 (1994); JVA Operating Company v. Kaiser-Francis Oil Company, 11 S.W.3d 504, 506 (Tex.App.—Eastland 2000, pet'n den'd).

The relevant portion of the operating agreement addressing abandonment of wells is VI.E.2, which is located under the Article titled "DRILLING AND DEVELOPMENT" which reads:

VI.E.2. Abandonment of Wells that have Produced: Except for any well in which a Non-Consent operation has been conducted hereunder for which the Consenting Parties have not been fully reimbursed as herein provided, any well which has been completed as a producer shall not be plugged and abandoned without the consent of all parties. If all parties consent to such abandonment, the well shall be plugged and abandoned in accordance with applicable regulations and at the cost, risk and expense of all the parties hereto. If, within thirty (30) days after receipt of notice of the proposed abandonment of any well, all parties do not agree to the abandonment of such well, those wishing to continue its operation from the interval(s) of the formation(s) then open to production shall tender to each of the other parties its proportionate share of the value of the well's salvable material and equipment, determined in accordance with the provisions of Exhibit "C," less the estimated cost of salvaging and the estimated cost of plugging and abandoning. Each abandoning party shall assign the non-abandoning parties, without warranty, express or implied, as to title or as to quantity, or fitness for use of the equipment and material, all of its interest in the well and related equipment, together with its interest in the leasehold estate as to, but only as to, the interval or intervals of the formation or formations then open to production.

As set forth by the supreme court in National Union Fire Insurance Company of Pittsburgh, Pennsylvania v. CBI Industries, Inc., 907 S.W.2d 517, 520 (Tex.1995):

The primary concern of a court in construing a written contract is to ascertain the true intent of the parties as expressed in the instrument. If a written contract is so worded that it can be given a definite or certain legal meaning, then it is not ambiguous. Parol evidence is not admissible for the purpose of creating an ambiguity.

If, however, the language of a...contract is subject to two or more reasonable interpretations, it is ambiguous. Whether a contract is ambiguous is a question of law for the court to decide by looking at the contract as a whole in light of the circumstances present when the contract was entered. (Citations omitted)

See also Coker v. Coker, 650 S.W.2d 391, 393 (Tex.1983).

We do not construe this provision of the operating agreement as being ambiguous. The operative language of the provision is the phrase "any well which has been completed as a producer shall not be plugged and abandoned without the consent of all parties." Cone does not dispute the fact that the wells have not been plugged. Irrespective of this fact, he contends that the wells in question have been abandoned because the efforts to remove hydrocarbons directly from them have ceased.

We disagree with Cone's construction of this provision. "Abandonment" involves a relinquishment of possession. See Pearson v. Black, 120 S.W.2d 1075, 1079 (Tex.Civ.App.—Eastland 1938, no writ). The wells had not been abandoned within the ordinary and customary meaning of the term because the wells continued to be utilized on a daily basis for the purpose of water injection. Furthermore, even though hydrocarbons were not produced directly from these wells, the wells were used for the purpose of obtaining production from other wells which produce from the same "interval(s) of the formation(s) then open to production" for which Cone is compensated. As noted by a leading treatise on the subject, "[t]he primary purpose of injecting gas or water into a reservoir is to cause the injected substance to move from the input wells toward the producing wells, driving the oil or wet gas before them." 1 W.L. SUMMERS, THE LAW OF OIL AND GAS § 76 (1954). We note that our holding is consistent with Osborn v....