Tennessee Gas Pipeline Co. v. Lenape Resources Corp.

• Decision Date: 25 August 1993
• Docket Number: No. 04-92-00613-CV,04-92-00613-CV
• Citation: 870 S.W.2d 286
• Parties: 24 UCC Rep.Serv.2d 45 TENNESSEE GAS PIPELINE COMPANY, Appellant, v. The LENAPE RESOURCES CORPORATION, et al., Appellees.
• Court: Texas Court of Appeals

Page 286

870 S.W.2d 286

24 UCC Rep.Serv.2d 45

TENNESSEE GAS PIPELINE COMPANY, Appellant, v. The LENAPE RESOURCES CORPORATION, et al., Appellees.

No. 04-92-00613-CV.

Court of Appeals of Texas,

San Antonio.

Aug. 25, 1993.

Rehearing Denied Jan. 26, 1994.

Thomas H. Watkins, C.A. Davis, Elizabeth C. Bloch, John R. Hathaway, Hilgers & Watkins, P.C., Austin, for appellant.

Dwight A. Dalrymple, Tejas Gas Corp., Rudy A. England, Michael L. Grove, Kendall Barrett, Hutcheson & Grundy, L.L.P., Houston, Charles R. Roberts, Emerson Banack, Jr., Susan Gellis Wozniak, William T. Armstrong, III, Foster, Lewis, Langley, Gardner & Banack, Inc., Gerald T. Drought, Martin, Drought & Torres, Inc., San Antonio, Frank Douglass, Scott, Douglass & Luton, L.L.P., Dallas, Elizabeth N. Miller, Jane M.N. Webre, Scott, Douglass & Luton, L.L.P., Austin, for appellees.

Before BUTTS, PEEPLES and RICKHOFF, JJ.

OPINION

BUTTS, Justice.

Appellant Tennessee Gas Pipeline Co. (Tennessee) appeals from an order granting appellees' motion for partial summary judgment and an adverse judgment following a non-jury trial. Appellee and cross-appellant The Lenape Resources Corp. (Lenape) appeals from an order granting Tennessee's motion for partial summary judgment and an adverse judgment on its counterclaim. We affirm in part and reverse and remand in part.

I. FACTS

Appellant Tennessee, as buyer, entered into a Gas Purchase and Sales Agreement (the GPA) on January 16, 1979. The original sellers were National Exploration Company and Eton Partnership. Appellee The Lenape Resources Corp. (Lenape) is the successor to those sellers. ¹ Appellee Gulf Energy and Development Corporation (Gulf) is the gatherer. ² Appellees Tesoro Exploration and Production Co. (Tesoro) and Coastal Oil and Gas Corp. (Coastal) were not parties to the GPA, but later entered a farmout agreement with Lenape. The term of the GPA is twenty years or until all the committed oil and gas leases terminate.

The GPA obligates Tennessee to take or pay for gas produced from committed reserves, with the quantity to be determined by the Seller's delivery capacity. The reserves are those located in and under various oil, gas and mineral leases in Zapata County. Lenape unitized all or portions of three of the committed leases and formed the Fantina Yzaguirre Gas Unit.

In 1989, the lessors in the Fantina Yzaguirre Gas Unit sued Lenape alleging that their leases had terminated because of failure to produce in paying quantities. The lessors thereafter entered a settlement agreement with Lenape by which they confirmed the leases. (The settlement agreement states that the leases are valid and subsisting and have been at all times.) Lenape then created two units (the Guerra A and Guerra B Units) each containing half committed acreage and half non-committed acreage. Lenape also entered a farmout agreement with Tesoro and Coastal pursuant to which Lenape assigned certain rights in the Fantina Yzaguirre leases, insofar as they were contained within the Guerra A and B Units. Tesoro drilled the Guerra A Well inside the Guerra A Unit but outside the acreage originally committed to the GPA. The Guerra B Well is similarly located within the Guerra B Unit but outside the originally committed acreage. Production from the Guerra A and B Wells is substantially greater than was production from the original wells physically located on the committed acreage.

Tennessee brought suit against appellees seeking a declaratory judgment construing various provisions of the GPA. Tennessee also asserted claims under the Deceptive Trade Practices-Consumer Protection Act (DTPA) and the Uniform Commercial Code (UCC). Lenape brought a counter-suit for breach of contract, anticipatory repudiation, economic duress and coercion, and tortious interference with contract. Gulf also brought its own declaratory action to protect its interest in a Gas Measurement Agreement and a Gas Transportation Agreement between Gulf and Tennessee whereby Gulf is paid for transportation of all gas dedicated to the GPA.

The court granted partial summary judgment denying Lenape's claims of anticipatory repudiation, breach of contract for underpayments prior to April 24, 1987, tortious interference with contract, and economic duress and coercion. The court further granted summary judgment that the GPA was not an output contract subject to section 2.306 of the UCC, Tennessee's DTPA claims were actually breach of contract claims not recognizable under the DTPA, and Tennessee lacked standing to challenge the validity of the underlying leases. In a second partial summary judgment, the court held that Lenape's counterclaim for loss of profits from a farmout opportunity was barred by limitations and provisions of the business and commerce code. Following a non-jury trial of the remaining issues, the court made various declarations regarding the parties' rights under the GPA, which declarations are discussed in more detail below.

II. OUTPUT CONTRACT; UCC SECTION 2.306

In point of error one, Tennessee contends that the court erred in granting summary judgment that the GPA is not an output contract governed by UCC section 2.306. The party moving for summary judgment has the burden of showing that no genuine issue of material fact exists and that it is entitled to judgment as a matter of law. TEX.R.CIV.P. 166a(c); Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 548 (Tex.1985); Swilley v. Hughes, 488 S.W.2d 64, 67 (Tex.1972). In deciding whether a disputed material fact issue precludes summary judgment, the reviewing court will take as true all evidence favoring the non-movant. Nixon, 690 S.W.2d at 548-49; Montgomery v. Kennedy, 669 S.W.2d 309, 311 (Tex.1984). Every reasonable inference from the evidence will be indulged in favor of the non-movant, and any doubts will be resolved in his favor. Nixon, 690 S.W.2d at 549; Montgomery, 669 S.W.2d at 311.

The summary judgment at issue in this point of error may be upheld only if, as a matter of law, (1) the GPA is not an output contract or (2) it is an output contract but is not governed by section 2.306 of the UCC. See TEX.BUS. & COM.CODE ANN. § 2.306 (Tex. UCC) (Vernon 1968). ³

A. Whether the GPA is an output contract.

An output contract measures the quantity to be sold by reference to the seller's good-faith output. See Cooper v. Fortney, 703 S.W.2d 217, 219 (Tex.App.--Houston [14th Dist.] 1985, writ ref'd n.r.e.). An ordinary supply contract, on the other hand, measures the quantity to be sold by stating a specific, fixed amount. Id.

The quantity provision of the GPA states, in pertinent part, as follows:

3. Quantity:

(a) Seller agrees to sell and deliver to Buyer, and Buyer agrees to purchase and receive, or pay for if available and not taken, Seller's pro rata part of the following quantities of gas produced from the committed reserves:

....

(ii) A quantity of gas well gas equal to eighty-five percent (85%) of Seller's delivery capacity.

....

The provision does not state a specific quantity of gas that Tennessee is obligated to purchase. Rather, the quantity is dependent upon "Seller's delivery capacity," which is defined in section 1(f) of the GPA as,

Seller's pro rata part of the average amount of gas well gas per day which can be efficiently withdrawn from the wells on the lease(s) ... the production from which is covered by this Agreement and which is available for delivery....

This measure of quantity establishes that the GPA is an output contract. See Cooper v. Fortney, 703 S.W.2d at 219; see also United States v. Great Plains Gasification Assoc., 819 F.2d 831, 835 n. 6 (8th Cir.1987); American Exploration Co. v. Columbia Gas Transmission Corp., 779 F.2d 310, 311 (6th Cir.1985); Columbia Gas Transmission Corp. v. Larry H. Wright, Inc., 443 F.Supp. 14, 20 (S.D.Ohio 1977).

We find unpersuasive appellees' argument that the GPA is not an output contract because there is a finite amount of gas subject to the agreement and, therefore, Tennessee is obligated under the contract to purchase a legally specific quantity of gas. This argument ignores the fact that the term of the GPA is for twenty years and that Tennessee's obligation is to buy 85% of Seller's delivery capacity in each contract year. Nowhere did Tennessee agree to purchase the entire, though finite, amount of gas attributable to the committed leases. Over the course of twenty years and considering reasonable increases in production (see discussion below), the amount produced could eventually correspond to the entire amount of gas existing under the leases. This is not equivalent, however, to providing that Tennessee is required to purchase all of the gas underlying the leases, regardless of how or when that gas is produced.

Appellee Gulf states in its brief, "Given that there is a finite quantity of gas to be produced, as defined by the scope of the dedication, the variable in the Contract is not the quantity of gas to be produced, but rather the rate at which the gas will be produced." Because quantity is computed by multiplying the rate of production by the duration of production, a variable rate contained within a fixed-term contract leads to the conclusion that the quantity term of the contract is also variable. Thus, we cannot conclude that the GPA contains a specific quantity term.

Because the quantity of gas covered by the GPA is not specifically stated but is determined in accordance with the Seller's production or delivery capacity, we hold that the GPA is an output contract. See Cooper v. Fortney, 703 S.W.2d at 219.

B. Whether the GPA is governed by section 2.306.

Section 2.306(a) of the Texas UCC states:

A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable...