Kachina Pipeline Co. v. Lillis

• Decision Date: 09 October 2015
• Docket Number: NO. 13–0596,13–0596
• Citation: 471 S.W.3d 445
• Parties: Kachina Pipeline Company, Inc., Petitioner, v. Michael D. Lillis, Respondent
• Court: Texas Supreme Court

471 S.W.3d 445

Kachina Pipeline Company, Inc., Petitioner,

v.Michael D. Lillis, Respondent

NO. 13–0596

Supreme Court of Texas.

Argued March 24, 2015

OPINION DELIVERED: October 9, 2015

Concurring in Part and Dissenting in Part Opinion by Chief Justice Hecht June 12, 2015

John Philip Gamble, Austin, for Amicus Curiae.

Marnie Ann McCormick, Duggins Wren Mann & Romero, LLP, Austin, G. William Fowler, Odessa, Scott C. Shelton, Scott C. Shelton, P.C., San Angelo, for Petitioner.

Franklin H. McCallum, Midland, Gary M. Bellair, H. Grady Terrill, III, Craig Terrill Hale & Grantham, L.L.P., Lubbock, W. Clayton Gaston, Law Offices of Gaston and Strain, Midland, for Respondent.

Opinion

Jeffrey V. Brown, Justice

We deny the motion for rehearing filed by Kachina Pipeline Company, Inc. We withdraw our opinion of June 12, 2015, and substitute the following in its place.

In this case we interpret a written natural-gas-purchase agreement between a natural-gas producer and a pipeline operator. On summary judgment, the trial court declared the agreement entitled the pipeline operator to deduct the costs of compression from its payments to the producer. The court further declared the agreement gave the pipeline operator the option to extend the arrangement for an additional five-year term. The court of appeals reversed, holding the agreement unambiguously allows neither the disputed deductions nor a five-year extension. We agree and thus affirm the court of appeals' judgment.

I

Kachina Pipeline Company, Inc., owns and operates a natural-gas gathering system and pipeline. It purchases gas from several producers and transports it for resale to Davis Gas Processing at one of Davis's processing plants. Michael Lillis is one of those producers, and he has sold gas from his wells to Kachina since at least 2001. In 2003, Kachina installed the Barker Central Compression Station on its pipeline. That compression allows Kachina to resell to Davis at its high-pressure inlet, for which Davis pays a higher per-volume price. Kachina installed additional compression in 2007.

In 2005, Kachina and Lillis entered into a new Gas Purchase Agreement naming Kachina as “Buyer” and Lillis as “Seller.” Under the Agreement, Lillis would transfer gas from his wells into Kachina's gathering system at specified delivery points and Kachina would pay Lillis a percentage of the proceeds it obtained through resale to Davis. A producer can successfully deliver gas only if its pressure is sufficient to overcome the working pressure in the gathering system, and the Agreement addresses the parties' rights and responsibilities as to pressure. It specifies that “neither party hereto shall be obligated to compress any gas” but provides that “[i]f Buyer installs compression to effect delivery of Seller's gas, Buyer will deduct from proceeds payable to Seller hereunder a value equal to Buyer's actual costs to install, repair, maintain and operate compression plus 20% of such costs to cover management, overhead and administration.”

The Agreement provides it is effective for an “initial period” expiring May 2010, at which point it continues month-to-month and is cancelable by either party upon thirty days' notice. “Upon termination or cancellation of [the] Agreement, prior to Seller selling gas to a third party,” Kachina has the option to “continue the purchase of gas under the terms of [the] Agreement with such adjustments in the price hereunder as may be required to yield the same economic benefit to Seller, as would be derived from the proposed third[-]party offer.”

Kachina bought, transported, and resold Lillis's gas according to the Agreement. It deducted from Lillis's share of the proceeds “marketing fees,” which included his pro rata share of compression costs. In 2008, Lillis entered into a purchase agreement directly with Davis and constructed his own pipeline to its plant. Around the same time, he objected to the compression fees Kachina had been deducting.

Lillis then sued, asserting that the Agreement did not authorize deduction for compression occurring after he delivered the gas to Kachina and that Kachina thus breached the Agreement by deducting those compression fees. He sought a declaration that Kachina was in breach and an accounting. He also brought a fraud claim, asserting that Kachina represented it would release him from the Agreement and that he built the new pipeline in reliance on that representation. Kachina counterclaimed, asserting Lillis breached the Agreement by failing to notify it of Davis's third-party offer. Kachina sought declarations that it had the right to deduct compression charges under the Agreement and that it exercised its option, extending the Agreement's term through May 2015.

Both parties moved for summary judgment, with Kachina filing a no-evidence motion for partial summary judgment on the fraud claim and a motion for traditional partial summary judgment on the declarations it sought. The trial court denied Lillis's motion for summary judgment and granted both of Kachina's, ordering that Lillis take nothing on his claims. The court declared in its final judgment that Kachina “has the right under the 2005 Gas Purchase Agreement to deduct from [Lillis's] monthly net proceeds compression costs” and that Kachina “duly exercised its option rights under the 2005 Gas Purchase Agreement so that the termination date of the Agreement has been extended to May 31, 2015.” It further awarded Kachina attorney's fees and expenses.

The court of appeals reversed those declarations. No. 03–10–00784–CV, 2013 WL 3186261, at *7, *9 (Tex.App.–Austin June 18, 2013)(mem.op.). It held the Agreement unambiguously does not allow Kachina to charge for compression that occurs after the gas transfers to Kachina, and thus it refused to consider extraneous evidence Kachina offered in an attempt to show that Lillis intended to assume such costs. Id.at *8. It also held that the option provided for in the Agreement does not allow for a five-year extension. Id.at *6. It consequently reversed the award of attorney's fees and remanded for consideration of Lillis's accounting claim. Id.at *11, *12. Kachina sought our review.

II

A declaratory judgment granted on a traditional motion for summary judgment is reviewed de novo. SeeProvident Life & Accident Ins. Co. v. Knott,128 S.W.3d 211, 215 (Tex.2003). Under the traditional standard for summary judgment, the movant has the burden to show that no genuine issue of material fact exists and that judgment should be granted as a matter of law. Tex. R. Civ. P.166a(c). “When reviewing a summary judgment, we take as true all evidence favorable to the nonmovant, and we indulge every reasonable inference and resolve any doubts in the nonmovant's favor.” Knott,128 S.W.3d at 215.

At issue here is the trial court's construction of the Agreement's compression-cost provision and construction of its option provision. The construction of an unambiguous contract is a question of law, also reviewed de novo. Tawes v. Barnes,340 S.W.3d 419, 425 (Tex.2011). When the agreement as written is ambiguous, however, the parties' intent becomes a fact issue.SeeItalian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am.,341 S.W.3d 323, 333 (Tex.2011). Whether a contract is ambiguous is itself a legal question for the court. Dynegy Midstream Servs., Ltd. P'ship v. Apache Corp.,294 S.W.3d 164, 168 (Tex.2009).

A

Whether the trial court properly declared the Agreement authorized deduction of the disputed costs depends on whether the compression-cost provision applies to the compression here. Kachina's deductions included Lillis's share of total system compressor costs, based on the proportion of gas moved through the system that originated from his wells. The Barker station was in place and operating at the time the parties entered into the Agreement. In 2007, Kachina added compression equipment to “enhance operations and move more gas through the system for delivery to Davis,” according to Kachina's president.

Kachina argues the provision authorizes deductions for any compression that aids in the final delivery to Davis of gas bought from Lillis. Under this interpretation, Kachina rightfully deducted Lillis's share of the costs of all compression. Lillis, on the other hand, argues the provision's plain language allows deductions only for compression that Kachina installs if Lillis fails to deliver at pressures that overcome Kachina's working pressure at the point of transfer. He thus argues Kachina must show (1) Lillis has become unable to deliver against Kachina's working pressure, and (2) the compression equipment was installed after the Agreement's execution. This interpretation would preclude deduction for the pre-existing compression at the Barker station. And though the compression added in 2007 would satisfy Lillis's second requirement, Kachina does not argue and the record does not support it was installed because one of Lillis's wells failed to deliver.

“In construing a contract, a court must ascertain the true intentions of the parties as expressed in the writing itself.” Italian Cowboy,341 S.W.3d at 333. We may consider the facts and circumstances surrounding a contract, including “the commercial or other setting in which the contract was negotiated and other objectively determinable factors that give context to the parties' transaction.” Americo Life, Inc. v. Myer,440 S.W.3d 18, 22 (Tex.2014).But while evidence of circumstances can be used to “inform the contract text and render it capable of only one meaning,” extrinsic evidence can be considered only to interpret an ambiguous writing, not to create ambiguity. See, respectively,id.; Friendswood Dev. Co. v. McDade & Co.,926 S.W.2d 280, 283 (Tex.1996). “A contract is not ambiguous simply because the parties disagree over its meaning.” Dynegy,294 S.W.3d at 168. Rather, “[i]f a written contract is so worded that it can be given a definite or certain legal meaning, then it is not ambiguous.” Nat'l Union Fire Ins....