Dorsett v. Valence Operating Co.

• Decision Date: 13 June 2003
• Docket Number: No. 06-02-00141-CV.,06-02-00141-CV.
• Citation: 111 S.W.3d 224
• Parties: Elmagene W. DORSETT, Appellant, v. VALENCE OPERATING COMPANY, Appellee.
• Court: Texas Court of Appeals

111 S.W.3d 224

Elmagene W. DORSETT, Appellant, v. VALENCE OPERATING COMPANY, Appellee.

No. 06-02-00141-CV.

Court of Appeals of Texas, Texarkana.

Submitted May 14, 2003.

Decided June 13, 2003.

Rehearing Overruled August 5, 2003.

Edwin E. Buckner Jr., Law Offices of Edwin E. Buckner, Jr., Marshall, for appellant.

Michael E. Warwick, Ruben K. Abney, Abney & Warwick, Marshall, for appellee.

Before MORRISS, C.J., ROSS and CARTER, JJ.

OPINION

Opinion by Chief Justice MORRISS.

This is an appeal of the partial summary judgment issued by the 71st Judicial District Court in Harrison County on August 8, 2002, and September 23, 2002. The summary judgment raises issues concerning interpretation of a provision in a joint operating agreement that imposes a nonconsent penalty¹ on parties to the agreement who do not timely elect to participate in proposed subsequent operations.

FACTUAL AND PROCEDURAL HISTORY

On September 9, 1981, TXO Production Corporation, as operator, and Elmagene W. Dorsett (hereafter "Dorsett"), as a 4.05391% working interest owner, executed a joint operating agreement covering the Mobley No. 1 Gas Unit composed of 677.04606 acres in Harrison County. This operating agreement followed the commonly-used 1977 Model Form 610 promulgated by the American Association of Professional Landmen. TXO drilled and completed the Mobley Well No. 1 as a commercially producing well. Dorsett participated as a working interest owner and paid her share of drilling and completion costs of this initial test well. In 1994, Marathon Oil Company, successor to TXO, and Amoco Production assigned to Valence Operating Company of Kingwood (hereafter "Valence") their interests in the unit, giving Valence a 94.28446% working interest, and Valence assumed operation of the Mobley No. 1 Gas Unit.

As operator, Valence proposed exploration and development of subsequent operations. Such proposals are specifically covered by the operating agreement. The pertinent sections of the operating agreement are as follows:

1. Proposed Operations: Should any party hereto desire to drill any well on the Contract Area other than the well provided for in Article VI.A. [the initial test well], ... the party desiring to drill, complete, rework, deepen, or plug back such a well shall give the other parties written notice of the proposed operation, specifying the work to be performed, the location, proposed depth, objective formation and the estimated cost of the operation. The parties receiving such a notice shall have thirty (30) days after receipt of the notice within which to notify the parties wishing to do the work whether they elect to participate in the cost of the proposed operation.... Failure of a party receiving such notice to reply within the period above fixed shall constitute an election by that party not to participate in the cost of the proposed operation....

2. Operations by Less than All Parties: If any party receiving such notice... elects not to participate in the proposed operation, then, in order to be entitled to the benefits of this article, the party or parties giving the notice and such other parties as shall elect to participate... shall, within sixty (60) days after the expiration of the notice period of thirty (30) days ... actually commence work on the proposed operation and complete it with due diligence.... If less than all parties approve any proposed operation, the proposing party, immediately after the expiration of the applicable notice period, shall advise the Consenting Parties of (a) the total interest of the parties approving such operation, and (b) its recommendation as to whether the Consenting Parties should proceed with the operation as proposed. Each Consenting Party, within forty-eight (48) hours (exclusive of Saturday, Sunday or legal holidays) after receipt of such notice, shall advise the proposing party of its desire to (a) limit participation to such party's interest as shown on Exhibit "A" or (b) carry its proportionate part of Non-Consenting Parties' interest. The proposing party, at its election, may withdraw such proposal if there is insufficient participation, and shall promptly notify all parties of such decision.

The entire cost and risk of conducting such operations shall be borne by the Consenting Parties in the proportions they have elected to bear same under the terms of the preceding paragraph.... If such an operation results in a dry hole, the Consenting Parties shall plug and abandon the well at their sole cost, risk and expense. If any well drilled, completed, reworked, deepened, or plugged back under the provisions of this Article results in a producer of oil and/or gas in paying quantities, the Consenting Parties shall complete and equip the well to produce at their sole cost and risk, and the well shall then be turned over to Operator and shall be operated by it at the expense and for the account of the Consenting Parties. Upon commencement of operations for the drilling, reworking, deepening or plugging back of any such well by Consenting Parties in accordance with the provisions of this Article, each Non-Consenting Party shall be deemed to have relinquished to Consenting Parties, and the Consenting Parties shall own and be entitled to receive, in proportion to their respective interests, all of such Non-Consenting [Parties'] interest in the well and share of production therefrom until the proceeds of the sale of such share ... shall equal the total of the following:

(a) 100% of each such Non-Consenting Party's share of the cost of any newly acquired surface equipment ... plus 100% of each such Non-Consenting Party's share of the cost of operation of the well commencing with first production and continuing until each such Non-Consenting Party's relinquished interest shall revert to it under other provisions of this Article, it being agreed that each Non-Consenting Party's share of such costs and equipment will be that interest which would have been chargeable to each Non-Consenting Party had it participated in the well from the beginning of the operation; and

(b) 300% of that portion of the costs and expenses of drilling ...; 300% of that portion of the cost of newly acquired equipment in the well (to and including the well head connections), which would have been chargeable to such Non-Consenting Party if it had participated therein.

A.A.P.L. Form 610-1977 art. VI.B. (1977) (emphasis added).

The trial court's judgment severed this cause of action, abated the remaining causes, and concluded that Valence complied with the above provisions regarding subsequent operations and that the nonconsent penalty is enforceable against Dorsett. On appeal of this judgment, Dorsett contends the above provisions in the operating agreement establish a chronological process with which Valence must comply in order to subject her to the nonconsent penalty. This process, she argues, requires that Valence give her notice of proposed operations thirty days before commencing work. Since she did not receive timely notice of the proposals, Dorsett claims, her duty to elect to participate was never triggered and, thus, her failure to elect could not render her a nonconsenting party subject to the nonconsent penalty.

In response, Valence argues that Article VI.B. (1) requires only that an operator give a nonoperator notice of a proposed operation and then allow a thirty-day election period. Valence reads this provision to mean that an operator can commence work at any time before or after notice is given to the nonoperating parties, as long as it allows the parties thirty days to make their election. Valence contends that Dorsett's failure to elect to participate within thirty days rendered her a nonconsenting party and subjected her to the 300% nonconsent penalty.

ANALYSIS

Standard of Review

We review a summary judgment de novo and will affirm it only if the summary judgment record establishes the movant's right to summary judgment as a matter of law. Gibbs v. Gen. Motors Corp., 450 S.W.2d 827, 828 (Tex.1970). When both parties move for summary judgment, each party bears the burden of establishing that it is entitled to judgment as a matter of law. See Guynes v. Galveston County, 861 S.W.2d 861, 862 (Tex.1993); Am. States Ins. Co. v. Arnold, 930 S.W.2d 196, 200 (Tex.App.-Dallas 1996, writ denied). When both sides file motions for summary judgment and the trial court grants one motion and denies the other, we consider all the evidence accompanying both motions to determine whether the trial court should have granted either party's motion, and, on finding error, we render the judgment the trial court should have rendered. See Jones v. Strauss, 745 S.W.2d 898, 900 (Tex.1988) (orig.proceeding); Arnold, 930 S.W.2d at 200. If neither movant demonstrates its right to summary judgment as a matter of law, we must remand the case to the trial court. See Howard v. INA County Mut. Ins. Co., 933 S.W.2d 212, 217 (Tex.App.-Dallas 1996, writ denied).

Validity and Effect of a Nonconsent Penalty

Dorsett challenges the validity of the nonconsent penalty as an unenforceable liquidated damages clause.² While the law does not favor such a damages clause, courts will enforce one when it satisfies a two-pronged test. Rio Grande Valley Sugar Growers, Inc. v. Campesi, 592 S.W.2d 340, 342 n. 2 (Tex.1979); Hamilton v. Tex. Oil & Gas Corp., 648 S.W.2d 316, 321 (Tex.App.-El Paso 1982, writ ref'd n.r.e.). Before a court will enforce a liquidated damages clause, it must find that the harm caused by the breach is of a nature that makes estimation of damages very difficult or impossible and that the amount of liquidated damages the provision calls for is a "reasonable forecast of just compensation." Campesi, 592 S.W.2d at 342.

Recognizing the nonconsent penalty as a mechanism through which consenting parties are compensated for assuming the financial risks associated with exploration and development, courts have held that...