Dall. Gas Partners, L.P. v. Prospect Energy Corp.

• Decision Date: 07 October 2013
• Docket Number: No. 12–20496.,12–20496.
• Citation: 733 F.3d 148
• Parties: DALLAS GAS PARTNERS, L.P., Plaintiff–Counter Defendant–Appellant v. PROSPECT ENERGY CORPORATION, Defendant–Counter Claimant–Appellee v. Dallas Gas GP, L.L.C.; Thomas P. Muse; David W. Nelson, Third Party Defendants–Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

733 F.3d 148

DALLAS GAS PARTNERS, L.P., Plaintiff–Counter Defendant–Appellant

v.PROSPECT ENERGY CORPORATION, Defendant–Counter Claimant–Appellee

v.Dallas Gas GP, L.L.C.; Thomas P. Muse; David W. Nelson, Third Party Defendants–Appellants.

No. 12–20496.

United States Court of Appeals, Fifth Circuit.

Oct. 7, 2013.

Jason Aron Itkin, Esq., Micajah Boatright, Arnold & Itkin, L.L.P., Houston, TX, for Plaintiff–Counter Defendant–Appellant.

Neil Kenton Alexander, Jr., Esq. (argued), Porter & Hedges, L.L.P., Houston, TX, for Defendant–Counter Claimant–Appellee.

Richard L. LaGarde (argued), Roger N. Chrisco, Attorney, Mary Ellis LaGarde, LaGarde Law Firm, P.C., Houston, TX, for Third Party Defendant–Appellant Thomas P. Muse.

Jason Aron Itkin, Esq., Micajah Boatright (argued), Arnold & Itkin, L.L.P., Houston, TX, for Third Party Defendant–Appellant Dallas Gas GP, L.L.C.

Melissa Lorber, Attorney, Craig T. Enoch (argued), Enoch Kever, P.L.L.C., Austin, TX, for Third Party Defendant–Appellant David W. Nelson.

Appeals from the United States District Court for the Southern District of Texas.

Before DENNIS, CLEMENT, and SOUTHWICK, Circuit Judges.

EDITH BROWN CLEMENT, Circuit Judge:

In this breach of contract case, appellants Dallas Gas Partners, L.P., Dallas Gas GP, L.L.C., Thomas Muse, and David W. Nelson contend that a contract's release and covenant not to sue did not bind individual limited partners or authorize recovery of attorneys' fees in the case of breach. The district court granted summary judgment in favor of appellee Prospect Energy Corp., included attorneys' fees in its award, and held that appellants were jointly liable. We affirm.

FACTS AND PROCEEDINGS

A. Background

Tom Muse, David Nelson, and Jeffrey Weiss, along with two other partners, formed Dallas Gas Partners, LP (“DGP”) pursuant to Texas law on July 20, 2004, under the name MNW Acquisition, LLP.¹ The five individuals were DGP's limited partners; its general partner was another partnership, MNW Partners, LLC (“MNW Partners”), which consisted of Muse, Nelson, and Weiss.

On July 29, DGP signed a purchase and sale agreement to buy Gas Solutions, Ltd. (“Gas Solutions”), a gas processing plant. As part of the agreement, DGP agreed to pay a non-refundable $500,000 deposit by September 3 and pay the balance by September 23. DGP attempted to finance the purchase by securing a loan from Prospect Energy Corp. (“Prospect”). DGP and Prospect signed a non-binding letter agreement on September 3, in which Prospect agreed to lend DGP almost 95% of the purchase price, subject to due diligence. The agreement included an exclusivity provision that prevented DGP from negotiating with other lenders during the agreement period. After conducting due diligence, Prospect informed DGP on September 21 that its diligence raised serious concerns and that it decided not to loan DGP the money. After DGP threatened to sue, the two entities traded proposals and counter-proposals for resolving the dispute. Prospect eventually accepted DGP's proposition that Prospect pay DGP $3.295 million as reimbursement for DGP's expenses and in exchange for DGP assigning Prospect its right to buy Gas Solutions.

To implement this proposal, DGP assigned the contract to purchase Gas Solutionsto DGP's general partner, MNW Partners, which Muse, Nelson and Weiss alone owned and managed.² Muse, Nelson, and Weiss then sold their individual membership interests in MNW Partners to Prospect, thus transferring the contract to Prospect.

B. Relevant documents

The parties memorialized this transaction in three documents on September 23. The first document—the “Unanimous Written Consent of the Partners of [DGP]”—was signed by the five DGP limited partners ³ and approved the assignment of the contract to purchase Gas Solutions to MNW Partners.⁴

The second document, the “LLC Membership Interest Purchase Agreement,” was signed by Muse, Nelson, Weiss, and Prospect CEO John F. Barry. It was

entered into by and among Thomas P. Muse, a resident of the State of Texas (“ Muse ”), David W. Nelson, a resident of the State of California (“Nelson”), and Jeffrey Weiss, a resident of the State of Texas (“ Weiss ”) (individually a “ Seller ” and collectively, the “ Sellers ”) and PEC White Oak LLC, a Delaware limited liability company (“ Purchaser ”).⁵

In addition to recording the transfer of the individual membership interests in MNW Partners to Prospect in return for $3.295 million, the agreement included a “Mutual Release” by which “[e]ach of the signatories ... including, without limitation, any parties acknowledging or consenting to this Agreement,” among other things, released all claims and rights arising out of and “covenant[ed] not to institute, maintain or prosecute any action, claim, suit, proceeding or cause of action” relating to the letter agreement. The release specified that “[i]n any litigation arising from or related to an alleged breach of [the Mutual Release], this Agreement may be pleaded as a defense, counterclaim or crossclaim.” A separate section of the agreement limited the recovery from a “claim otherwise asserted in litigation under or pertaining to this Agreement” to “actual damages.” The agreement also included a New York choice-of-law provision.

The final document was the “Consent and Agreement of Limited Partners of [DGP].” Signed by each of the five DGP limited partners, it provided that:

[E]ach of the undersigned, being a limited partner of the Partnership, hereby acknowledges, consents to and approves of:

(i) the assignment of the Partnership [of its right to purchase Gas Solutions]; [and]

(ii) the transfer and assignment by each of Thomas P. Muse, David W. Nelson and Jeffrey Weiss of their respective member interest in MNW Partners, LLC, to PEC White Oak LLC....

In addition, each limited partner of the Partnership agrees to and ratifies the provisions set forth in Section 9 [the Mutual Release] of the foregoing LLC Membership Interest Purchase Agreement.

C. Proceedings

Notwithstanding the Mutual Release, DGP sued Prospect two months later in the Southern District of Texas alleging fraud, breach of fiduciary duty, and tortious interference with its agreement to purchase Gas Solutions. Prospect counterclaimed alleging breach of the covenant not to sue. Prospect subsequently added claims against DGP's general partner Dallas Gas GP, LLC (“Dallas Gas GP”) and against Muse, Nelson, and Weiss.⁶ After discovery, Prospect moved for summary judgment, arguing that the Mutual Release barred DGP's claims.

The district court referred Prospect's motion for summary judgment to a magistrate judge. Although noting that the LLC Membership Interest Purchase Agreement was entered into by Muse, Nelson, and Weiss, the magistrate judge observed that “[i]t is undisputed that all of DPG's [sic] limited partners signed consents agreeing to the LLC agreement and that they were attached to the document.” He found that “the evidence clearly shows that DGP's partners signed these pages [of the consent] in their capacities as limited partners and not in their ‘individual’ capacities.” The magistrate also found that “DGP was the intended beneficiary of the sale and was the real party in interest,” discrediting Nelson's affidavit testimony that “he received payment only in his capacity as a partner of MNW Partners.” The magistrate concluded that DGP was bound by the release. He then noted that DGP did not argue that its claims were not within the scope of the release. Because the release bound DGP and its claims were within the release's scope, he recommended that the district court grant Prospect's motion for summary judgment on DGP's claims.

The district court adopted the magistrate's report and recommendation and granted Prospect's motion in February 2006. It also denied DGP's request for leave to amend its complaint to add the same claims against an affiliate and employees of Prospect because DGP did not allege any activity or propose to add any defendant not covered by the release. The district court subsequently denied DGP's motion to file an interlocutory appeal of the court's denial of its leave to amend. DGP nevertheless appealed and this court dismissed for lack of jurisdiction. Following this dismissal, DGP filed suit in the Eastern District of Texas, bringing the same claims that the district court in the Southern District had refused to allow it to add. This suit was transferred to the Southern District as a duplicative suit, consolidated with the ongoing litigation, and disposed of on motion for summary judgment in January 2008 for the reasons set forth in the district court's and magistrate judge's earlier rulings.

Meanwhile, Prospect filed a Second Amended Counterclaim and Third–Party Complaint in June 2006 against DGP's current and former general partners (Dallas Gas GP and Nelson) as well as Muse, Nelson, and Weiss for, among other claims, breach of the covenant not to sue. Prospect also moved for summary judgment in July 2006 on its counterclaim against DGP for breach of the covenant.

Addressing Prospect's motion, the magistrate judge found that DGP “clearly violated the [r]elease” by filing its lawsuit. Dallas Gas Partners, LP v. Prospect Energy Corp., No. G–04–669, 2007 WL 1466833, at *3 (S.D.Tex. May 16, 2007). The magistrate judge further noted that the LLC Membership Interest Purchase Agreement provided for “actual damages” that, for breach of a covenant not to sue, include the attorneys' fees incurred defending against the offending suit. Id. at *2. He also found that an award of attorneys'fees was proper because the “suit was an open and obvious breach of the Release brought by DGP in bad faith.” Id. at *3. Based on his findings, he recommended that the district court grant Prospect's motion. Id. The district court adopted the magistrate's report and recommendation and granted Prospect summary judgment on its counterclaim against DGP in May 2007. Id. at *1.

The district court entered final...