Navasota Resources. v. First Source Texas

• Citation: 249 S.W.3d 526
• Decision Date: 09 January 2008
• Docket Number: No. 10-06-00236-CV.,10-06-00236-CV.
• Parties: NAVASOTA RESOURCES, L.P., Appellant, v. FIRST SOURCE TEXAS, INC., First Source Gas, LP, Gastar Exploration Texas, LLC f/k/a Bossier Basin, LLC, First Texas Gas, LP, First Source Bossier LLC, Gastar Exploration, LTD., Chesapeake Energy Corp., Chesapeake Exploration, LP & Chesapeake Operating, Inc., Appellees.
• Court: Court of Appeals of Texas

249 S.W.3d 526

NAVASOTA RESOURCES, L.P., Appellant, v. FIRST SOURCE TEXAS, INC., First Source Gas, LP, Gastar Exploration Texas, LLC f/k/a Bossier Basin, LLC, First Texas Gas, LP, First Source Bossier LLC, Gastar Exploration, LTD., Chesapeake Energy Corp., Chesapeake Exploration, LP & Chesapeake Operating, Inc., Appellees.

No. 10-06-00236-CV.

Court of Appeals of Texas, Waco.

January 9, 2008.

Rehearing Overruled March 18, 2008.

Kent Rutter, and Lynne Liberato, Haynes & Boone, LLP, Houston, Gayle Wilson Ray, Buffalo, for appellant.

James D. Thompson III, Vinson & Elkins LLP, Jesse R. Pierce, King & Spalding, Houston, Roger Knight, Jr., Roger Knight Jr., Inc., Madisonville, Bryan F. Russ, Jr., Palmos Russ McCullough & Russ LLP, Hearne, for appellees.

Before Chief Justice GRAY, Justice VANCE, and Justice REYNA.

OPINION

FELIPE REYNA, Justice.

Navasota Resources, L.P. filed suit to enforce a preferential right provision in a joint operating agreement it had with First Source Texas, Inc. The trial court granted summary judgment motions filed by: (1) First Source, its parent company Gastar Exploration Texas, L.P., and other related entities; and (2) Chesapeake Energy Corp. and two related entities. The court denied a summary judgment motion filed by Navasota. Navasota contends in two issues that the court erred by: (1) granting the summary judgment motions filed by the First Source/Gastar entities and the Chesapeake entities; and (2) denying the summary judgment motion filed by Navasota. We will reverse and render in part and reverse and remand in part.

Background

The joint operating agreement applies to certain oil and gas interests in an area of mutual interest straddling the Navasota River along the boundary between Leon and Robertson Counties. The parties refer to the property included in the joint operating agreement as the "Hilltop Prospect." At the time the parties executed the joint operating agreement, Navasota owned an undivided fifty-five percent working interest in these lands, and First Source owned an undivided forty-five percent working interest. The operating agreement is a standard agreement, Form 610-1989, promulgated by the American Association of Petroleum Landmen.¹

This agreement contains the following provision regarding the preferential right which Navasota seeks to enforce:

Should any party desire to sell all or any part of its interests under this agreement, or its rights and interests in the Contract Area, it shall promptly give written notice to the other parties, with full information concerning its proposed disposition, which shall include the name and address of the prospective transferee (who must be ready, willing and able to purchase), the purchase price, a legal description sufficient to identify the property, and all other terms of the offer. The other parties shall then have an optional prior right, for a period of ten (10) days after the notice is delivered, to purchase for the stated consideration on the same terms and conditions the interest which the other party proposes to sell; and, if this optional right is exercised, the purchasing parties shall share the purchased interest in the proportions that the interest of each bears to the total interest of all purchasing parties. However, there shall be no preferential right to purchase in those cases where any party wishes to mortgage its interests, or to transfer title to its interests to its mortgagee in lieu of or pursuant to foreclosure of a mortgage of its interests, or to dispose of its interests by merger, reorganization, consolidation, or by sale of all or substantially all of its Oil and Gas assets to any party, or by transfer of its interests to a subsidiary or parent company or to a subsidiary of a parent company, or to any company in which such party owns a majority of the stock.

In September 2005, Gastar Exploration, Ltd., the parent company of First Source, signed a letter of intent with "Chesapeake Energy Corporation and/or its affiliate Chesapeake Exploration Limited Partnership" with three primary components:

(1) Chesapeake would purchase 19.9 percent of Gastar's outstanding shares of common stock;

(2) Chesapeake would purchase 33.33 percent of First Source's working interest in the Hilltop Prospect, while First Source would retain 66.67 percent of its working interest; and

(3) Chesapeake and Gastar would enter an area of mutual interest (AMI) comprising thirteen counties in East Texas.

On October 18, First Source Vice President Henry J. Hansen mailed a letter to the attention of Mike Ellis, Vice President of Alta Mesa Resources, Inc. (Navasota's general partner), informing Navasota of the deal with Chesapeake. That letter reads as follows:

Gastar Exploration, Ltd., and its wholly owned subsidiary First Source Gas, L.P. (collectively called Gastar), have entered into a Letter of Intent (LOI) with Chesapeake Energy Corporation (Chesapeake) to sell a portion of its leasehold interest in the lands subject to the referenced Operating Agreement (Operating Agreement). A press release is enclosed that summarizes the LOI. Among other specifics, Chesapeake has agreed to purchase 1/3rd of Gastar's net leasehold acres in the subject lands at a cost of $700 per net acre. In addition, Chesapeake has agreed to pay 44.44% of the costs through casing point in the first 6 deep Bossier Test Wells, proposed by Gastar, to earn a 33.33% working interest, proportionately reduced to Gastar's interest. Currently Gastar owns 21,484 net acres in the subject lands. Chesapeake's net expenditure to acquire this leasehold will be $5,012,933 (21,484 net acres × $700 × .3333).

Pursuant to Article VIII. F., of the Operating Agreement you have 10 days from the receipt of this notification to elect your preferential right to purchase. If you so elect you will be obligated to pay Gastar $5,012,933 for 1/3rd of Gastar's net leasehold acreage that is subject to the Operating Agreement. Further, you must elect to pay 44.44% of the costs through casing point in the first 6 deep Bossier Test Wells, proposed by Gastar, to earn a 33.33% working interest, proportionately reduced to Gastar's interest.

Although you have 10 days to make your decision, Gastar and Chesapeake plan to close on October 31, 2005. Therefore, your early election is requested and appreciated.

Please make your election in the space provided below and fax your election to my attention at [telephone number].

Please return an original signed election to my attention by regular mail in the enclosed envelope.

Hansen attached a press release to this letter describing in more detail the tripartite agreement between Gastar and Chesapeake.

By letter dated October 21, Navasota notified First Source of its intent to exercise its preferential right. Navasota sent a copy of its election to the number indicated by facsimile at 2:53 p.m. and delivered the original via Federal Express.

Meanwhile, First Source sent a second letter dated October 21 advising Navasota that the October 18 "letter was erroneous." "Therefore First Source Gas, L.P. hereby rescinds said notice." Navasota received this letter by facsimile at about 5:00 p.m. on October 21.

Two days later, First Source sent by facsimile a second notice letter regarding the exercise of Navasota's preferential right. In this letter, First Source explained that Navasota must comply with every aspect of the tripartite agreement between Gastar and Chesapeake (i.e., (1) the stock purchase; (2) the net acreage purchase with additional drilling costs; and (3) entry into the 13-county AMI) if Navasota intended to exercise its preferential right. Navasota refused to accept First Source's "modified" offer and insisted that the parties had a binding contract based on Navasota's acceptance of the terms set forth in the October 18 notice letter. In response, Gastar acknowledged by letter dated October 28 that it had received Navasota's purported acceptance letter dated October 21 (on Monday morning, October 24) but insisted that "Gastar had every right to rescind the ambiguous notice." Thus, Gastar refused to close the deal which Navasota sought. Instead, Gastar and Chesapeake closed on their agreement on November 4.

The Litigation

Navasota filed suit on October 31.² By its third amended petition, Navasota alleged claims for breach of contract, suit to quiet title, trespass to try title, tortious interference with contract, conversion, money had and received, and declaratory relief. In particular, Navasota sought (1) specific performance of its preferential right, (2) to quiet title to the Hilltop Prospect, and (3) damages. Gastar (and First Source as its subsidiary) generally denied Navasota's allegations and alleged several affirmative defenses. Chesapeake answered in similar fashion.

Chesapeake filed the first summary judgment motion.³ Chesapeake alleged in this motion: (1) Navasota's preferential right under the joint operating agreement was not invoked by the Gastar-Chesapeake transaction; (2) if Navasota's preferential right was invoked, Navasota failed to accept the offer because it failed to accept all of the terms and conditions of the Gastar-Chesapeake agreement; and (3) if Navasota's acceptance was valid, the preferential right provision constitutes an unreasonable restraint on alienation.

Gastar moved for summary judgment on the ground that Navasota failed to properly exercise its preferential right because it failed to accept all of the terms and conditions of the Gastar-Chesapeake agreement.

Finally, Navasota moved for summary judgment on the grounds that: (1) Navasota properly exercised its preferential right (2) First Source breached the preferential right provision of the joint operating agreement; (3) the October 18 notice letter created a binding option in Navasota's favor which First Source could not rescind; (4) First Source could not change the terms of the option created by the October 18 notice letter; ...