Exxonmobil Corp. v. Valence Operating Co.

• Decision Date: 16 June 2005
• Docket Number: No. 01-02-00994-CV.,01-02-00994-CV.
• Citation: 174 S.W.3d 303
• Parties: EXXONMOBIL CORPORATION, Appellant, v. VALENCE OPERATING COMPANY, Appellee.
• Court: Texas Supreme Court

174 S.W.3d 303

EXXONMOBIL CORPORATION, Appellant, v. VALENCE OPERATING COMPANY, Appellee.

No. 01-02-00994-CV.

Court of Appeals of Texas, Houston (1st Dist.).

June 16, 2005.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Jack Balagia, Jr., Steven J. Watkins, McGinnis, Lochridge & Kilgore, L.L.P., Joseph Nwaokoro, Houston, TX, Karen Lynn Watkins, McGinnis, Lochridge & Kilgore, L.L.P., Austin, TX, for Appellant.

Brad Beers, Beers & Associates, Levon G. Hovnatanian, Martin, Disiere, Jefferson & Wisdom, L.L.P., Allison Taylor Blizzard, Robert J. Magner, Houston, TX, for Appellee.

Panel consists of Justices NUCHIA, JENNINGS, and KEYES.

OPINION ON REHEARING

EVELYN V. KEYES, Justice.

This is an appeal of a judgment awarding $834,299 in damages and $166,250 in attorney's fees to plaintiff and appellee, Valence Operating Company, for breach of contract by defendant and appellant, ExxonMobil Corporation, after a three-day bench trial. In six issues, ExxonMobil contends that the trial court erred by (1) misconstruing the maintenance-of-interest provision of the parties' joint operating agreement; (2) admitting evidence of ExxonMobil's relationship with a third party; (3) finding that ExxonMobil breached the maintenance-of-interest provision; (4) awarding Valence damages for breach; (5) awarding Valence attorney's fees; and (6) awarding Valence prejudgment interest. As a preliminary matter underlying all of these issues, ExxonMobil contends that Valence should never have been allowed to adduce evidence of breach of contract because it had filed no timely pleading in which it made proper allegations of breach or of damages. By opinion issued October 28, 2004, we modified the judgment and, as modified, affirmed. Both parties moved for rehearing. We now grant the motions for rehearing of both parties, withdraw our October 28 opinion, and issue this opinion in its stead. We affirm.

Factual & Procedural Background

ExxonMobil and Valence are the successors-in-interest to companies that had entered into a joint operating agreement (JOA) in 1983 governing an oil and gas lease in Gregg and Upshur Counties. The lease was known as the Gladewater Gas Unit No. 16 (Unit 16). ExxonMobil's predecessor was designated operator of Unit 16. It owned 81.8% of Unit 16, and Valence's predecessor owned 18.2%. As part of the JOA, the parties agreed to a maintenance-of-interest (MOI) provision that limited their right to transfer or to assign their interests in Unit 16. After the JOA was executed, ExxonMobil's predecessor drilled wells in Unit 16 through the higher Cotton Valley Sand formation and into the lower Cotton Valley Lime formation, three of which produced gas. During the drilling of these wells, it was determined that in the shallower Cotton Valley Sand formation that there were "proven behind-pipe reserves" in Unit 16.

In 1996, ExxonMobil, which had succeeded to its predecessor's interest, entered into a farmout agreement with Wagner & Brown, Ltd. (WB) and C.W. Resources (CW), giving them the right to drill a well in Unit 16 to a depth sufficient to test the Cotton Valley Sand formation and to earn the conveyance to them of ExxonMobil's interest in the Cotton Valley Sand portion of Unit 16 upon the successful completion of the test well and the fulfillment of certain other conditions. WB and CW proposed two new wells to Valence. Not knowing that WB and CW had any relationship with Unit 16, Valence did not respond to the new well proposals. Instead, Valence wrote to ExxonMobil and made inquiries. ExxonMobil informed Valence about the farmout agreement. Valence still did not respond to WB's and CW's proposals and was deemed non-consenting on the two wells. WB and CW subsequently proposed three more wells to Valence, which elected to participate "under protest." All of the new wells produced. Valence was assessed non-consent penalties on the first two wells pursuant to the JOA.

In March 1998, Valence sued ExxonMobil for breach of contract, alleging that ExxonMobil's decision to farm out a portion of its interest in Unit 16 violated the MOI provision in the JOA. Valence alleged that the MOI provision prevented the parties from transferring interests covered by the JOA unless the conveying party transferred either an undivided interest or the party's entire interest in Unit 16. Valence also contended that the behind-pipe reserves in the Cotton Valley Sand formation could have been accessed less expensively from the existing wellbores that accessed the Cotton Valley Lime formation than by drilling additional wells and that, by farming out its interest in the Cotton Valley Sand formation, Exxon had breached the JOA and forced Valence to incur non-consent penalties and the additional expenses associated with the drilling of new wells that it would not have incurred but for the breach. Valence sought to recover the non-consent penalties assessed against it and its share of the difference between the cost of capturing the behind-pipe reserves in the Cotton Valley Sand from the existing wellbores and the cost of drilling additional wells to the Cotton Valley Sand.

On October 10, 1998, upon WB and CW's fulfillment of the conditions in the farmout agreement, ExxonMobil assigned its interest in the Cotton Valley Sand level in Unit 16 to WB and CW in accordance with the farmout agreement. The date is significant because Valence sued ExxonMobil before the date of the assignment and its original pleadings were premised on ExxonMobil's sale of a segregated portion of its interest in Unit 16 that had not yet happened.

The trial court scheduled the case for trial on February 18, 2000 by a scheduling order dated November 1, 1999. On February 3, 2000, in anticipation of a new trial setting and scheduling order, the parties executed a written Rule 11¹ agreement extending those deadlines in the November 1, 1999 scheduling order that had not yet not arrived and establishing March 10, 2000 as the deadline for discovery, motions for summary judgment, and amendments or supplements to the pleadings. The parties agreed that the deadlines established by the court in its new scheduling order would control over the deadlines for those events established in the November 1, 1999 scheduling order. Subsequently, on February 9, 2000, the trial court issued a new scheduling order setting the case for trial on April 11, 2000, but leaving all other deadlines blank.

On April 11, 2000, when trial was not reached, the parties executed a second Rule 11 agreement in contemplation of a later trial setting, in which they agreed that "the deadline for amending pleadings in the above-styled case was March 10, 2000." In the April Rule 11 agreement, ExxonMobil agreed not to oppose Valence's filing of its First Amended Petition so long as Valence did not make any changes other than to correct the defendant's name from Exxon Company U.S.A. to ExxonMobil Corporation. Like the February Rule 11 agreement, the April Rule 11 agreement was written, entitled "Rule 11 Agreement," signed by counsel for both parties, and filed so that it is part of the clerk's record.

Three days later, on April 14, 2000, ExxonMobil filed a sworn "Agreed Motion for Continuance," requesting a continuance until May 9, 2000. The trial court granted the motion for continuance on the same day. Also on that same day, Valence filed a Second Amended Petition, amending the section entitled "Breach of Contract," adding the word "assignment" for the first time in regard to the farmout transaction, and seeking for the first time to establish its entitlement to special damages. ExxonMobil opposed the filing of Valence's Second Amended Petition and moved to strike it as forbidden by the April Rule 11 agreement.

The trial court subsequently reset the case for trial on six different occasions. By orders entered February 25, 2002, the court denied ExxonMobil's motion to enforce the parties' Rule 11 agreements, denied ExxonMobil's motion to strike Valence's Second Amended Petition, and granted Valence's motion to file the Second Amended Petition. Following a bench trial on March 5, 2002, the trial court ruled in favor of Valence and entered findings of fact and conclusions of law. This appeal followed.

Rule 11 Agreements

As a preliminary matter, ExxonMobil argues that the trial court lacked discretion to refuse to enforce the parties' Rule 11 agreements, which it contends set March 10, 2000 as the deadline for amended pleadings and held Valence to its live pleadings as of that date.

To be enforceable, any agreement between parties touching on a pending suit must be in writing, signed, and entered into the court's record. TEX.R. CIV. P. 11. The purpose of Rule 11 is to ensure that agreements of counsel affecting the interests of their clients are not left to the fallibility of human recollection and that the agreements themselves do not become sources of controversy. Padilla v. LaFrance, 907 S.W.2d 454, 464 (Tex.1995) (Enoch, J., dissenting) (citing Wyss v. Bookman, 235 S.W. 567, 569 (Tex. Comm'n App.1921, holding approved) and Kennedy v. Hyde, 682 S.W.2d 525, 530 (Tex.1984)). The filing requirement creates the imprimatur of a court record. Padilla, 907 S.W.2d at 464 (Enoch, J., dissenting); Kennedy, 682 S.W.2d at 528.

A trial court has a ministerial duty to enforce a valid Rule 11 agreement. See EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 91 (Tex.1996) (holding that when EZ Pawn agreed to delay hearing as long as Gonzalez filed response at least one week before hearing, but Gonzalez filed response and affidavit one day before hearing, trial and appellate courts erred in considering affidavit); Fed. Lanes, Inc. v. City of Houston, 905 S.W.2d 686, 690 (Tex.App.-Houston [1st Dist.] 1995, no writ) (holding that when Rule 11 prerequisites were met, trial court had ministerial duty to grant relief in strict accordance with parties' agreement).

However, it is not sufficient that a party's consent to a Rule 11...