Pegasus Energy Group v. Cheyenne Petroleum

• Decision Date: 31 August 1999
• Parties: (Tex.App.-Corpus Christi 1999) PEGASUS ENERGY GROUP, INC.,Appellant, v. CHEYENNE PETROLEUM COMPANY,Appellee. NUMBER 13-97-498-CV
• Court: Texas Court of Appeals

Page 112

3 S.W.3d 112 (Tex.App.-Corpus Christi 1999)

PEGASUS ENERGY GROUP, INC.,Appellant, v. CHEYENNE PETROLEUM COMPANY,Appellee.

NUMBER 13-97-498-CV

COURT OF APPEALS THIRTEENTH DISTRICT OF TEXAS CORPUS CHRISTI

August 31,1999.

Rehearing Overruled Oct. 21, 1999.

On appeal from the 81st District Court of LaSalle County, Texas. [Copyrighted Material Omitted]

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Before Chief Justice Seerden and Justices Hinojosa and Yanez.

Opinion by Justice Hinojosa

O P I N I O N

After a bench trial, the trial court signed a final judgment in favor of appellee, Cheyenne Petroleum Company. By seven points of error, appellant, Pegasus Energy Group, Inc., contends: (1) the trial court's interpretation of the Exploration Agreement and Authority for Expenditure was erroneous; (2) the award of prejudgment interest was erroneous; (3) the trial court's failure to find a breach of contract against Cheyenne was against the great weight and preponderance of the evidence; (4) the trial court's failure to find damages, including attorney's fees, in favor of Pegasus was against the great weight and preponderance of the evidence; (5) Cheyenne failed to segregate attorney's fees among its various claims and defenses; (6) the award of attorney's fees to Cheyenne was unreasonable and excessive, and a remittitur should be ordered; and (7) the testimony of Everett Holseth was admissible and its exclusion affected a substantial right of Pegasus. We modify the trial court's judgment and, as modified,affirm.

A. BACKGROUND

On May 2, 1990, Pegasus and Inco Oil Corporation, by letter agreement, entered into an Operating Agreement for the Devine Nuts well.¹ Pegasus assumed one hundred percent of the risks, costs, and expenses for the drilling, completing, and equipping of the well. On May 8, 1990, Cheyenne entered into an agreement with Pegasus to participate in the drilling and operation of the Devine Nuts well. Cheyenne agreed to take thirty percent of the risks, costs, and expenses of the well, and Pegasus agreed to retain the remaining seventy percent. Inco prepared the AFE for this well. The Operating Agreement for the Devine Nuts well did not include an approval clause for expenditures. Cheyenne did not drill this well; it was drilled by Inco. Cheyenne became the operator of the well on June 15, 1990, after it was drilled, and the original Operating Agreement was maintained for the well. Cheyenne billed Pegasus for its proportion of the expenditures on the well in accordance with the Operating Agreement.² disputes arose in relation to this well when Pegasus failed to pay Cheyenne for its proportionate share of the operating expenses, because Pegasus contended it was being improperly billed.

By letter agreement, dated August 6, 1990, Pegasus acquired an interest in the Buttles and Garcia/Ealand Prospects from Inco. As in the Devine Nuts well, Pegasus agreed to pay for one hundred percent of the risks, costs and expenses of the well. On August 29, 1990, Cheyenne acquired an interest from Pegasus and began to participate in the drilling of the Buttles and Garcia/Ealand Prospects.³ The Exploration Agreement between the two companies allowed Cheyenne to buy in for thirty percent of the risks, costs, and expenses of the well, and Pegasus agreed to retain the remaining seventy percent. In the agreement, Cheyenne was designated as the operator of the well, which meant that Cheyenne would do the actual drilling. The initial test well in the Garcia/Ealand Prospect was the Ledwig well. Attached to the agreement, as Exhibits "C" and "D" were two "Authority for Expenditure" ("AFE"), which were estimates of the costs to perform the specific operations for each well.⁴ Included in the agreement ,at the suggestion of Pegasus, but drafted by Cheyenne, was a cap on expenditures because Pegasus feared Cheyenne might unnecessarily spend because Cheyenne had never drilled a horizontal well. This provision, set out in paragraph six of the Exploration Agreement, provides, "[p]arties further agree that written approval shall be required for any expenditures which exceeds [sic] the AFEs attached hereto by ten percent (10.00%) or more."

As for the Devine Nuts well, the Operating Agreement stated the manner in which the operator was to bill the working interest owner, and the manner in which the working interest owner was to make payment.⁵ Essentially, when Cheyenne incurred an expense, Pegasus was billed for its proportionate share of the expenses. After the execution of the Exploration Agreement, disputes arose between the parties regarding payments due Cheyenne from Pegasus. Cheyenne claimed that Pegasus had delayed and failed to make payments for which Pegasus was responsible. Pegasus asserted it had made all payments due and that Cheyenne had charged for expenses it was not responsible for under the agreement. The disagreement is based on the approval clause found in paragraph six of the Exploration Agreement. Pegasus asserts the agreement required Cheyenne to obtain written approval if expenditures on any item in the AFE exceeded 110% of the estimate for that item. Cheyenne asserts the agreement required writtenapproval only if the total expenditures exceeded 110% of the total estimate in the AFE.

B. PROCEDURAL HISTORY

On July 16, 1991, Cheyenne filed suit against Pegasus for breach of contractual obligations to pay Cheyenne as operator for expenses incurred in the operation of the Devine Nuts and Ledwig wells. Cheyenne further alleged that: (1) Pegasus had committed fraud by making false representations as to its intent and ability to meet financial obligations under the Ledwig well Operating Agreement; (2) Pegasus engaged in negligent misrepresentation by supplying false information; (3) Pegasus misrepresented or fraudulently concealed its intent to honor the contractual obligations of the Operating Agreement; and (4) Pegasus's conduct was committed knowingly, willfully, and maliciously, or, with such heedless and reckless disregard of the rights and welfare of Cheyenne as to show conscious indifference, that Cheyenne was entitled to exemplary damages.

Pegasus filed a counterclaim against Cheyenne, alleging that Cheyenne had breached its obligations as the operator under the terms of the Operating Agreements for the wells. Pegasus generally alleged that Cheyenne had inaccurately and improperly billed Pegasus for the operations of the Devine Nuts and Ledwig wells. Specifically, Pegasus alleged that Cheyenne had breached its obligation as operator of the Devine Nuts well by: (1) allowing a pumping unit to burn up because Cheyenne had failed to fill it with oil and subsequently erred in billing Pegasus for this unit; (2) failing to dispose of idle or surplus materials; (3) losing income from the production of oil as a result of the ruined pump; (4) allowing the well to flare gas for over a month resulting in the loss of gas; (5) not operating the well in a workmanlike manner; (6) asserting invalid and unsubstantiated claims against Pegasus in that Cheyenne repeatedly claimed that Pegasus had not paid its share of the costs and expenses associated with the well; and (7) failing to open a separate bank account for the prospect. As to the Ledwig well, Pegasus alleged that Cheyenne had breached its obligations as the operator by: (1) exceeding the line item amount specified in the AFE and by not obtaining written approval from Pegasus if its expenditures were to exceed any line item by ten percent; (2) charging Pegasus for items not authorized by the Operating Agreement; and (3) asserting invalid and unsubstantiated claims against Pegasus in that Cheyenne repeatedly claimed that Pegasus had not paid its share of the costs and expenses associated with the well. Pegasus further alleged that Cheyenne had misrepresented its experience and ability to drill and operate the Devine Nuts and Ledwig wells.

In its findings of fact and conclusions of law and supplemental findings of fact and conclusions of law, the trial court found that the approval clause in paragraph six of the Exploration Agreement required Cheyenne to obtain written approval for expenditures that exceeded the total AFE by ten percent.⁶ On April 28, 1997, the trial court found that Cheyenne had suffered damages in the amount of $46,887.34 on the Devine Nuts well and awarded prejudgment interest in the amount of $36,596.66 on the unpaid and untimely made payments. The trial court also found that Cheyenne had suffered damages in the amount of $101,267.13 on the Ledwig well and awarded $79,041.35 in prejudgment interest. The trial court also found that Cheyenne had incurred attorney's fees in the amount of $293,821.43. The trial court denied Cheyenne's claims for fraud, negligent misrepresentation, fraud in the inducement, and exemplary damages.

As to Pegasus's counterclaim, the trial court found that Cheyenne was not negligent in the operation of the wells and that it did not misrepresent its ability, capability, or competence to operate the wells. The trial court also denied Pegasus's claims for failure to perform as a reasonable and prudent operator, failure to dispose of the defective pump, losing oil production, and failure to timely negotiate gas purchase contracts. The trial court found that Cheyenne had breached the Devine Nuts Operating Agreement by failing to maintain a separate bank account, but found that Pegasus had not incurred any damages from the breach. In calculating damages, the trial court gave Pegasus credit for various expenses, including overhead duplication, technical consultants, tubular reconciliation, technical company labor, and Cheyenne's failure to comply with the approval clause of the Exploration Agreement for the Ledwig well.

C. APPROVAL CLAUSE

By its first point of error, Pegasus contends the trial court erred, as a matter of law, in its construction of the Exploration Agreement and the Authority for...