Fender, Matter of
| Citation | 12 F.3d 480 |
| Decision Date | 27 January 1994 |
| Docket Number | No. 92-4967,92-4967 |
| Parties | , Bankr. L. Rep. P 75,711 In the Matter of Harris R. FENDER, Jr., David M. Fender and Zapata Partnership, Ltd., Debtors. TRANSAMERICAN NATURAL GAS CORPORATION, Appellant-Cross Appellee, v. ZAPATA PARTNERSHIP, LTD., Appellee-Cross Appellant. |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
John Nabors, Cynthia Hollingsworth, Richard E. Miller, Gardere & Wynne, Dallas, TX, Keith Dollahite, Hardy & Atherton, Michael A. Hatchell, Ramey & Flock, P.C., Tyler, TX, Stacy R. Obenhaus, Gardere & Wynne, Dallas, TX, for appellant.
David W. Elrod, Thomas C. Jones, Calhoun, Gump, Spillman & Stacy, P.C., Dallas, TX, for appellee.
Appeals from the United States District Court for the Eastern District of Texas.
Before REYNALDO G. GARZA, KING and DeMOSS, Circuit Judges.
TransAmerican Natural Gas Corporation appeals the bankruptcy and district courts' interpretation of a settlement agreement between it and Zapata Partnership, LTD. We AFFIRM the bankruptcy court in all respects, except we REVERSE the bankruptcy court's conclusion that TransAmerican owed Zapata a duty of good faith and fair dealing, and the amount of attorneys' fees it awarded Zapata. If the bankruptcy court based any of Zapata's damages on breach of the duty of good faith and fair dealing, then we REMAND to reduce Zapata's damage award accordingly. Finally, we REMAND to the bankruptcy court to make the appropriate reduction in Zapata's attorneys' fees.
Appellant TransAmerican Natural Gas Corporation ("TransAmerican") is a Texas corporation. Appellee Zapata Partnership Ltd. ("Zapata") is a Texas limited partnership. This case is in federal court because it arose from a bankruptcy adversary proceeding. Both TransAmerican and Zapata had mineral interests in 2,000 acres of real property known as the La Perla B tract ("the tract"), which is part of the La Perla Ranch in Zapata County, Texas.
Zapata owned a 27.77 percent mineral interest in the tract. 1 TransAmerican was an operator who had obtained a leasehold interest in the tract, but had not been able to lease Zapata's 27.77 percent interest. TransAmerican and Zapata were thus cotenants in the tract's minerals. TransAmerican drilled five wells on the tract and completed three of them as gas wells. Zapata did not consent to the drilling of these wells nor did it advance any costs. The wells began producing in 1986. As an unleased cotenant, Zapata was entitled to a "profit share" of the production from the wells.
On March 20, 1987, several creditors of Zapata filed an involuntary Chapter 11 proceeding against Zapata. At the time the involuntary petition was filed, TransAmerican owed Zapata substantial sums of money in connection with the gas wells TransAmerican had drilled. Zapata filed an adversary proceeding against TransAmerican in August 1987, claiming that TransAmerican used improper accounting and charged Zapata in excess of its reasonable costs, forcing Zapata into bankruptcy.
Both parties agreed to settle the lawsuit, entering into a settlement agreement on December 17, 1988 which was incorporated into a final judgment in the bankruptcy court on December 19, 1988. 2 Paragraph 7 of the settlement agreement concerned the amount TransAmerican would pay Zapata as a result of TransAmerican's litigation with El Paso Natural Gas Company ("ENGC").
TransAmerican had a gas purchase agreement with ENGC which included the La Perla B gas wells. Under the agreement, ENGC was to pay TransAmerican a certain price for a set minimum amount of gas, whether ENGC actually took delivery of the gas or not. This agreement is known in the industry as a "take-or-pay" provision. 3 While TransAmerican was still litigating the first adversary proceeding against Zapata, it brought an action against ENGC claiming that ENGC had stopped taking delivery of gas and had refused to make take-or-pay payments. Therefore, when TransAmerican and Zapata were negotiating their 1988 settlement, one of the assets on the negotiation table was TransAmerican's potential recovery against ENGC.
About a year after the settlement agreement between Zapata and TransAmerican, the dispute between TransAmerican and ENGC was itself settled. Under that settlement, ENGC agreed to pay TransAmerican $300,000,000 in cash along with some non-cash assets ("the El Paso recovery"). The cash damages included "price" damages, "take-or-pay" damages and "repudiation" damages.
Zapata and TransAmerican disagreed on the interpretation of paragraph 7 of their settlement agreement. After TransAmerican refused to pay sums Zapata contended were due, Zapata filed another adversary proceeding (the suit now on appeal) on March 16, 1990, alleging, inter alia, that TransAmerican had breached the settlement agreement.
The bankruptcy court agreed with Zapata's interpretation of paragraph 7 and found that TransAmerican had breached the settlement agreement. The bankruptcy court found that Zapata was entitled to $11,590,811 under paragraph 7. The bankruptcy court concluded, however, that because TransAmerican settled with ENGC and only received 63 percent of the damages awarded to it in cash, Zapata was only entitled to receive 63 percent of the $11,590,811. Therefore, the bankruptcy court awarded Zapata $7,3000,210.93 as damages relating to paragraph 7.
TransAmerican appealed to the district court and the district court entered a judgment on July 28, 1992, affirming the bankruptcy court's interpretation of paragraph 7. The district court, however, modified the bankruptcy court's judgment with regard to Zapata's litigation expenses, and ordered that the attorneys' fees be paid directly to Zapata rather than its attorneys.
After its post-judgment motions were denied, TransAmerican filed its notice of appeal to this Court on September 16, 1992. Zapata cross-appeals challenging the bankruptcy court's reduction of its damages.
TransAmerican raises five issues on appeal. TransAmerican claims the bankruptcy court erred in: (1) its interpretation of paragraph 7 of the settlement agreement; (2) its rulings on parol evidence; (3) concluding that TransAmerican breached a duty of good faith and fair dealing; (4) awarding Zapata $43,200 as reimbursement for money Zapata paid to maintain its leases; and (5) the amount of attorneys' fees it awarded to Zapata.
Zapata cross-appeals claiming that the bankruptcy court erred in reducing its damage award from $11,590,811 to $7,302,210.93.
We find that the bankruptcy court did not err in: (1) its interpretation of the settlement agreement; (2) its rulings on parol evidence; (3) awarding Zapata $43,200 as reimbursement; and (4) reducing Zapata's damage award from $11,590,811 to $7,302,210.93. The bankruptcy court, however, erred in: (1) concluding that TransAmerican breached a duty of good faith and fair dealing; and (2) the amount of attorneys' fees it awarded to Zapata.
TransAmerican claims the bankruptcy court erred in its interpretation of paragraph 7 of the December 17, 1988 settlement agreement.
Paragraph 7 of the settlement agreement reads as follows:
Plaintiff [Zapata] will retain and be entitled to receive its pro rata portion of any money received by Defendant [TransAmerican] as a result of its litigation with El Paso Natural Gas Company with respect to any differential in price applicable to the sale of gas from wells drilled on the Ranch. Plaintiff's share of any such proceeds will be for gas sold through October 31, 1988. Any adjustment in the price obtained from gas or make-up gas taken after that date will be paid on the basis of Plaintiff's 17.5% overriding royalty interest.
TransAmerican argues that its settlement agreement with Zapata concerned only an accounting and payment for gas produced and sold from the La Perla B wells; therefore Zapata should receive its pro rata share of only that part of the El Paso recovery which relates to gas that was actually removed from the ground and delivered to a purchaser. TransAmerican's interpretation would greatly reduce Zapata's share, because the great majority of the El Paso recovery was calculated not from gas produced and sold, but from projections of gas that would have been sold had ENGC not repudiated the gas purchase agreement. The damages were to compensate harm to TransAmerican's expectation interest--its right to expect gas purchases to be made in the future under its contract with ENGC. Thus, TransAmerican argues that any money that it received in settlement of its claims against ENGC cannot be considered "money received ... with respect to any differential in price applicable to the sale of gas from wells drilled on the ranch." TransAmerican argues that Zapata, as the owner of an overriding royalty interest, will receive its share of revenues when the natural gas is actually produced and sold. TransAmerican claims that Zapata's rights as a royalty owner would not be infringed by this interpretation of paragraph 7.
TransAmerican concludes, therefore, that Zapata should only receive a pro rata share of the "price" damages in the El Paso recovery--the portion of the settlement proceeds applicable to ENGC's refusal to pay the full contract price for gas it purchased. This interpretation of paragraph 7 would give Zapata $806 from the El Paso recovery, rather than the $7,302,210 awarded to Zapata by the bankruptcy and district courts.
Zapata in contrast, argues that this is a contract case, rather than an oil and gas case. Zapata claims that in the December 1988 negotiations--in addition to insisting upon the $1.7 million for unpaid gas production--it bargained for a larger share of the El Paso recovery in exchange for settling additional "business loss" claims it had against TransAmerican, i.e., bankruptcy expenses, accounting, breach of fiduciary duty and punitive damages....
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