Phillips v. Carlton Energy Grp., LLC, 12–0255

• Decision Date: 08 May 2015
• Docket Number: NO. 12–0255,12–0255
• Citation: 475 S.W.3d 265
• Parties: Gene E. Phillips, Individually and d/b/a Phillips Oil Interests, LLC, EurEnergy Resources Corporation, Syntek West, Inc., CabelTel International Corporation, Natron Investments, A&B Capital Corporation, Southmark Corporation, Basic Capital Management, Inc., May Trust, O.S. Holdings, Inc., and Envicon Development Corporation, Petitioners, v. Carlton Energy Group, LLC, Respondent
• Court: Texas Supreme Court

475 S.W.3d 265

Gene E. Phillips, Individually and d/b/a Phillips Oil Interests, LLC, EurEnergy Resources Corporation, Syntek West, Inc., CabelTel International Corporation, Natron Investments, A&B Capital Corporation, Southmark Corporation, Basic Capital Management, Inc., May Trust, O.S. Holdings, Inc., and Envicon Development Corporation, Petitioners,

v.Carlton Energy Group, LLC, Respondent

NO. 12–0255

Supreme Court of Texas.

Argued September 11, 2013

Opinion delivered: May 8, 2015

Rehearing Denied December 18, 2015

Evan Andrew Young, Thomas R. Phillips, Baker Botts LLP, Austin, Jeffrey James McNabb, Baker Botts LLP, Karlene D. Poll, First District Court of Appeals, Peter M. Kelly, Kelly, Durham & Pittard, L.L.P., Houston, Mitchell Madden, Thomas V. Murto III, Holmgren Johnson: Mitchell Madden, LLP, William V. Dorsaneo III, SMU School of Law, Dallas, for Petitioner Gene E. Phillips.

J. Kevin Oncken, Uzick & Oncken, P.C., Jeffrey H. Uzick, Uzick Oncken PC, Houston, John Frederick Redwine, Eric Redwine Law Offices, Farmers Branch, Thomas R. Phillips, Baker Botts LLP, Austin, for Petitioner EurEnergy Resources Corp.

Melissa Ann Johnson, Mitchell Madden, Thomas V. Murto III, Holmgren Johnson: Mitchell Madden, LLP, Robert B. Gilbreath, Hawkins Parnell Thackston & Young LLP, William V. Dorsaneo III, SMU School of Law, Dallas, for Petitioner Syntek West, Inc.

David M. Gunn, Beck Redden LLP, Jeffrey L. Oldham, Warren W. Harris, Bracewell & Giuliani LLP, Justin Brett Busby, Fourteenth Court of Appeals, Kendall C. Montgomery, Paula Janecek Mathers, William Fred Hagans, Hagans Burdine Montgomery Rustay, P.C., Kevin H. Dubose, LaDawn H. Conway, Roger D. Townsend, Alexander Dubose Jefferson & Townsend LLP, Houston, Vincent L. Marable III, Paul Webb, P.C., Wharton, for Respondent Carlton Energy Group, LLC.

Joseph M. Nixon, Beirne Maynard & Parsons LLP, Timothy J. Hogan, Deans & Lyons LLP, Houston, for other interested party Basic Capital Management, Inc. and May Trust.

Charles Imlay Appler, Mark E. Bennett, Bennett Weston LaJone & Turner PC, Dallas, for other interested party Natron Investments, A & B Capital Corporation.

Mitchell Madden, Holmgren Johnson: Mitchell Madden, LLP, Dallas, for other interested parties O.S. Holdings, Inc., Southmark Corporation, and Envicon Development Corp.

Tracy Nicole Leroy, Sidley Austin LLP, Houston, for Amicus Curiae Accenture LLP.

Hugh Rice Kelly, Texans for Lawsuit Reform, Austin, for Amicus Curiae Texans for Lawsuit Reform.

George S. Christian, Texas Civil Justice League, Austin, for Amicus Curiae Texas Civil Justice League.

Chief Justice Hecht delivered the opinion of the Court.

Wildcatting is speculative business, especially in a foreign country, but it is business nonetheless. Data is gathered, risks are assessed, deals are reached, and money is made and lost, all in something of a competitive market. An investment is sometimes a roll of the dice but other times a cold calculation. The law does not compensate gambling losses but does afford damages for the reasonable value of interests wrongfully taken.

In this case, the plaintiff and the main defendant both wanted an interest in a coalbed methane exploration prospect in Bulgaria. A jury found that the defendant obtained his interest by tortiously interfering with the owner's contract to convey an interest to the plaintiff. The defendant denies liability but argues that "the key question" is whether the evidence of the fair market value of the plaintiff's lost interest is too speculative to support the jury's award of damages.

That value depends in part on the profits the interest would have generated, which in turn depend, of course, on the associated risks. Texas law is quite clear that lost profits cannot be recovered as damages unless proven to a reasonable certainty, and the defendant argues that the rule applies equally to profits-based value determinations. We agree. But reasonable certainty must be measured in context, and when projected profits are considered in determining the value of a mineral prospect to be actually purchased or sold, the relevant metrics are supplied by the business market that values, invests in, and trades on such interests. Ultimately, the dispute here is not whether the rule applies but how ; in this context and others, "the real difficulty lies not so much in the statement of the rules as it does in the application of the correct rule."¹ We conclude that the requirement of proof to a reasonable certainty does not preclude all recovery in this case, but neither does it permit recovery of all the damages found by the jury.

We affirm the judgment of the court of appeals² in part, reverse in part, and remand the case to that court for further proceedings.

I

A

This case arises out of three relationships—between the owner of a prospect and each of two investors, and between the investors themselves.

The owner and first investor: CBM and Carlton

In October 2000, the Republic of Bulgaria granted CBM Energy Limited a three-year concession to explore for coalbed methane in an unproven 450–square–kilometer field in the Dobroudja Coal Basin.³ The concession required CBM to drill one exploratory well, and if successful, two additional wells. The concession could be extended under similar terms twice for two years each. If CBM made a commercial discovery, it could submit a production development plan for the Bulgarian government's approval, which could not be unreasonably withheld.

CBM could not fund the project itself and immediately inquired whether Carlton Energy Group, LLC, would be interested in partnering with it to help find investors, but Carlton, in the words of one of its principals, "didn't have time to mess with it." That indifference changed in 2003. Still not having raised the funding for the concession, CBM again contacted Carlton, and this time, Carlton expressed interest.

In April, Carlton agreed to pay CBM up to $8 million in three stages or "tranches" for up to a 48% interest in the project. The first tranche of $1.25 million was to cover the various costs for beginning the project and completing the first exploratory well, estimated at $750,000. If the well was successful, the second tranche, $1.5 million for the two additional wells, was due three months later. The $5.25 million balance of the $8 million was to be paid within a year after the second tranche and would go to further development of the prospect. For each timely paid tranche, Carlton would receive a proportionate share of a 48% interest in the project—7.5%, then another 9%, and finally the remaining 31.5%.

But Carlton, too, needed investors to fund its share of the project, and by October, when the concession was set to expire, none had been found. CBM applied for a two-year extension, and the Bulgarian government agreed but required as one condition that CBM provide a $600,000 letter of credit to ensure completion of the first well.⁴ CBM could not meet even this requirement on its own and again turned to Carlton for aid. In April 2004, CBM and Carlton amended their agreement, retaining the same basic structure, but lowering the first tranche to $900,000, raising the second to $1.85 million, and adjusting the proportionate shares acquired in the first and second tranches to 5.4% and 11.1%, respectively. The $900,000—the $600,000 letter of credit required by the Bulgarian government and $300,000 cash—was to cover most of the cost involved in completing the first well, again estimated at $750,000. The second tranche, still due within three months of the first, was for the completion of the remaining two wells.

To fund the first tranche, Carlton turned to Robert Assil and Kenneth Scholz, two friends of one of its principals, Thomas O'Dell. Assil provided $600,000 for the letter of credit, half of which was a loan to O'Dell, and Scholz sent CBM $300,000 cash. O'Dell, Assil, and Scholz agreed they would form a joint venture with Carlton to hold Carlton's 48% interest in the project, each owning one-fourth of the venture.

In tendering his $300,000, Scholz wrote CBM directly:

In order to achieve ample time to properly evaluate the initial well, it is requested that a minimum time of 90 days from the final date of funding or 45 days from the receipt of logs, whichever is later, be granted. If this request is unacceptable, please return my funds....

CBM responded by letter to Carlton that it would "not agree to such terms":

Mr. Scholz' attempt to wire the $300,000.00 to CBM with conditions attached does not constitute performance and is not acceptable to CBM. Again, CBM will not agree to any such extension of the deadline for funding the second tranche of funding, 45 days or otherwise.

Carlton replied, asserting that Scholz's condition on his tender was no different from an oral amendment the parties had made to their agreement to delay funding the second tranche until 30 days after Carlton reviewed logs from the initial well:

The conditions set out by Dr. Scholz for the transfer of funds are substantially the same as the conditions set out in the [Carlton]-CBM Agreement as amended, i.e. the second tranche funding to take place within 90 days of the funding of the initial tranche, with the caveat that [Carlton] will have no less than 30 days to review the logs from the initial well. Although not in the [Carlton]-CBM Agreement, this 30 day period to review the logs was verbally agreed between Mr. O'Dell of [Carlton] on behalf of the investor group and Mr. Cook of CBM and discussed with Mr. Ray Pilcher of Raven Ridge Resources who advised at the time that he saw that as a reasonable request and had no objections. [Dr. Scholz] has agreed to the 30 days.... Carlton considers that the funding requirement under the [Carlton]-CBM Agreement has been fully complied with....

CBM did not object to these assertions or refuse to accept Scholz's money.

Carlton and CBM continued to work toward funding the project. Carlton offered interests to numerous recognized investors, as it had...