TransAmerican Natural Gas Corp. v. Finkelstein

• Decision Date: 14 August 1996
• Docket Number: No. 04-95-00365-CV,04-95-00365-CV
• Parties: TRANSAMERICAN NATURAL GAS CORPORATION and TransTexas Gas Corporation, Appellants, v. H.S. FINKELSTEIN, Appellee.
• Court: Texas Court of Appeals

Page 591

933 S.W.2d 591

57 A.L.R.5th 877

TRANSAMERICAN NATURAL GAS CORPORATION and TransTexas Gas Corporation, Appellants, v. H.S. FINKELSTEIN, Appellee.

No. 04-95-00365-CV.

Court of Appeals of Texas,

San Antonio.

Aug. 14, 1996.

Opinion on Denial of Rehearing Oct. 9, 1996.

Rehearing Overruled Oct. 9, 1996.

David M. Gunn, Rothenberg & Gunn, Bellaire, C.M. Zaffirini, Zaffirini, Castillo & Pellegrin, Laredo, Jeff Wentworth, San Antonio, Fred Wahrlich, TransTexas Gas Corporation, Houston, Roy R. Barrera, Jr., Nicholas & Barrera, P.C., San Antonio, for appellants.

Elizabeth N. Miller, Steve Selby, Bob Bullock, Martin L. Allday, Scott, Douglass, Luton & McConnico, L.L.P., Austin, Frank Douglass, Scott, Douglass, Luton & McConnico, L.L.P., Dallas, Morgan L. Copeland, Scott, Douglass, Luton & McConnico, L.L.P., Houston, Arturo A. Figueroa, Jr., Timothy E. Gehl, Law Offices of Arturo A. Figueroa, Zapata, Robert J. Hearon, Jr., Graves, Dougherty, Hearon & Moody, Austin, Gregory Luna, Luna & Luna, San Antonio, Michael B. Silva, amicus curiae, Paul F. Simpson, Silva & Simpson, L.L.P., Houston, John S. Lowe, amicus curiae, George W. Hutchison, Southern Methodist University School of Law, Dallas, James N. Castleberry, Jr., amicus curiae, San Antonio, Edwin P. Horner, amicus curiae, Waco, Everard A. Marseglia, Jr., amicus curiae, Burns, Wooley & Marseglia, L.L.P., Houston, for appellee.

Before CHAPA, C.J., and RICKHOFF, LOPEZ, STONE, HARDBERGER, GREEN and DUNCAN, JJ., en banc.

OPINION ON APPELLANTS' MOTION FOR REHEARING EN BANC

CHAPA, Chief Justice.

This appeal questions whether a royalty owner is entitled to share in the settlement proceeds arising from the breach of a take-or-pay oil and gas contract when some of the gas not taken is sold on the spot market. The appellants, TransAmerican Natural Gas Corporation and TransTexas Gas Corporation (collectively, TransAmerican), filed a motion for rehearing and motion for rehearing en banc after this court issued its panel opinion of April 3, 1996. We grant TransAmerican's motion for rehearing en banc and deny its motion for rehearing as moot. Furthermore, we withdraw our earlier opinion and substitute this opinion in its place. Although we adopt the panel's holding regarding TransAmerican's affirmative defenses, we reject its discussion of TransAmerican's marketing duty. We reverse and render because a royalty owner is not entitled to settlement proceeds from a take-or-pay contract absent lease language to that effect.

Summary of Facts

In 1974, John R. Stanley, owner of TransAmerican and its predecessors, assigned Hub Finkelstein, an independent oil producer, an overriding royalty interest In 1981, El Paso exercised its preferential purchase right to purchase. It entered into a long-term gas purchase agreement with TransAmerican, but once again Finkelstein was not a party to the contract. Under this gas purchase contract, TransAmerican dedicated its entire interest in the La Perla Ranch to El Paso. In exchange, El Paso agreed to take or, if it did not take, pay for 80 percent of the La Perla production for a fifteen-year term. El Paso also received a five-year make-up or recoupment right, which entitled it to later take "gas which it paid for but did not receive" at the delivery price minus the take-or-pay payment. ³

"equivalent to 1/16 of the net revenue interest" from all mineral rights Finkelstein secured for TransAmerican. ¹ In addition, Finkelstein was required to sell his gas to TransAmerican under a gas purchase agreement. A year later, Finkelstein arranged for TransAmerican and El Paso Natural Gas (El Paso) to enter into a farmout agreement for the La Perla Ranch in Zapata County, Texas. ² However, Finkelstein was not a party to this contract between TransAmerican and El Paso. As a result of his prior agreement with TransAmerican, Finkelstein earned a 1/16th overriding royalty interest in the La Perla Ranch, subject to El Paso's preferential right to purchase.

In 1983, as a result of sharply declining gas prices, El Paso filed a declaratory judgment action seeking to avoid the take-or-pay provision of its gas purchase contract with TransAmerican. TransAmerican counterclaimed for underpayment of gas and for breach of the take-or-pay provision. During that litigation, TransAmerican continued to sell gas on the spot market for less than the price El Paso had agreed to pay.

Also in 1983, TransAmerican filed Chapter 11 bankruptcy, and Finkelstein filed an adversary claim for, among other things, unpaid royalties and breach of his gas purchase agreement with TransAmerican. Finkelstein's claims were settled in 1987. The settlement (1) confirmed Finkelstein's 1/16th overriding royalty in the La Perla Ranch; (2) paid Finkelstein for accrued underpaid and unpaid royalties, a portion of which was to come from the still pending litigation with El Paso; and (3) conveyed to Finkelstein an additional 1 1/2 percent overriding royalty in the La Perla field equivalent to "net revenue interest of .015."

In 1990, after the trial court rendered a $603 million judgment against El Paso, TransAmerican settled its dispute with El Paso for cash and property valued at $360 million. As part of the settlement, the parties terminated their prior agreements, including the 1975 farmout and 1981 gas purchase contract. As a result, El Paso's make-up right was terminated. El Paso conveyed its interest in the La Perla Ranch to TransAmerican, which, in turn, released its claims and those of its "assigns." Although Finkelstein was not a party to the TransAmerican/El Paso contract nor did he participate in their settlement agreement, the settlement terminated his interest in the La Perla Ranch. See Medallion Oil Co. v. TransAmerican Natural Gas Corp. (In re GHR Energy Corp.), 972 F.2d 96, 99-100 (5th Cir.1992), cert. denied, 507 U.S. 1042, 113 S.Ct. 1879, 123 L.Ed.2d 497 (1993) (explaining that Finkelstein's overriding royalty was "washed out" by the termination of TransAmerican's lease).

Although TransAmerican paid Finkelstein royalty on the gas it produced and sold on the spot market during its litigation with El The trial court submitted the case to the jury on Finkelstein's theories that TransAmerican breached its duty to reasonably market and was unjustly enriched. The jury returned a verdict in Finkelstein's favor on both theories, and the trial court rendered judgment for $8,247,021 in actual damages and $4,458,158 in attorney's fees. TransAmerican appealed; and, in four points of error, challenges the legal and factual basis of Finkelstein's recovery.

Paso, it refused to pay Finkelstein any part of the El Paso settlement. Finkelstein sued TransAmerican to recover royalty on the amount paid by El Paso to settle TransAmerican's "repudiation claim" for gas that TransAmerican produced and sold between October 1, 1987 through December 31, 1989; that is, the date Finkelstein began receiving royalty from TransAmerican under their 1987 settlement agreement and the last date on which Finkelstein owned a royalty interest in the La Perla Ranch. These "repudiation damages" represented the difference between the price under El Paso's gas purchase agreement and the lower spot market price.

TransAmerican's Affirmative Defenses

In its third point of error, TransAmerican argues that Finkelstein's claim is barred by the accord and satisfaction reflected in the 1987 settlement agreement and by res judicata. Because these arguments, if successful, would be dispositive of this appeal, we consider them first.

1. Accord and Satisfaction

In points of error 3-A and 3-B, TransAmerican argues that, as a matter of law, Finkelstein's claim is barred by accord and satisfaction. Alternatively, TransAmerican argues that the jury's contrary finding is against the great weight and preponderance of the evidence. We review TransAmerican's sufficiency complaints under the well-established rules for measuring the legal and factual sufficiency of the evidence. See Robert W. Calvert, "No Evidence" and "Insufficient Evidence" Points of Error, 38 TEX. L. REV . 361, 362-68 (1960). While accord and satisfaction is a question of law reviewed de novo, the parties here disagree over the factual interpretation of the 1987 settlement agreement.

The affirmative defense of accord and satisfaction "rests upon a new contract, express or implied, in which the parties agree to the discharge of the existing obligation by means of the lesser payment tendered and accepted." Jenkins v. Henry C. Beck Co., 449 S.W.2d 454, 455 (Tex.1969). To prove that a particular agreement rises to the level of an accord and satisfaction, "[t]he evidence must establish an assent of the parties to an agreement that the amount paid by the debtor to the creditor was in full satisfaction of the entire claim." Id.

TransAmerican's evidence includes the following sentence taken from the 1987 settlement agreement:

Another $367,000 is due under Adversary Proceeding No. 85-0946-H2-5 if the Debtors prevail in their suit against El Paso Natural Gas for gas sold and delivered, and shall be paid to [Finkelstein] upon receipt by the Debtors of satisfaction of such an award from El Paso.

Lifting this sentence out of context--and disregarding the phrase "sold and delivered"--lends some credence to TransAmerican's accord and satisfaction argument.

However, when read in context, the sentence refers to Finkelstein's claims for royalties accrued and unpaid prior to April 1987; the agreement did not purport to settle Finkelstein's claim to royalties accrued during the period at issue here, i.e., October 1, 1987 through December 31, 1989. See Finkelstein v. TransAmerican Natural Gas Corp. (In re TransAmerican Natural Gas Corp.), 127 B.R. 800, 803 (S.D.Tex.1991) (describing TransAmerican's "contention" as "erroneous. The $367,000 was for gas previously produced from La Perla and for which royalties were owing. The 1987 settlement did not involve royalties to future...