Universal Resources Corp. v. Panhandle Eastern Pipe Line Co.

• Court: U.S. Court of Appeals — Fifth Circuit
• Writing for the Court: Before REAVLEY and RANDALL; WOODWARD
• Citation: Universal Resources Corp. v. Panhandle Eastern Pipe Line Co., 813 F.2d 77 (5th Cir. 1987)
• Decision Date: 31 March 1987
• Docket Number: No. 86-1420,86-1420
• Parties: 3 UCC Rep.Serv.2d 988 UNIVERSAL RESOURCES CORPORATION, Plaintiff-Appellee Cross-Appellant, v. PANHANDLE EASTERN PIPE LINE COMPANY, Defendant-Appellant Cross-Appellee.

Page 77

813 F.2d 77

3 UCC Rep.Serv.2d 988

UNIVERSAL RESOURCES CORPORATION, Plaintiff-Appellee Cross-Appellant, v. PANHANDLE EASTERN PIPE LINE COMPANY, Defendant-Appellant Cross-Appellee.

No. 86-1420.

United States Court of Appeals Fifth Circuit.

March 31, 1987.

Jacks C. Nickens, Houston, Tex., Michael Byrd, Akin, Gump, Strauss, Hauer & Field, Dallas, Tex., for defendant-appellant cross-appellee.

Dan S. Boyd, Johnson & Swanson, Dallas, Tex., for plaintiff-appellee cross-appellant.

Appeals from the United States District Court for the Northern District of Texas.

Before REAVLEY and RANDALL, Circuit Judges, and WOODWARD, ^* District Judge.

WOODWARD, District Judge:

FACTS

This is a diversity case arising out of the breach of a Gas Purchase and Sales Agreement between Universal Resources Corporation (URC) and Panhandle Eastern Pipe Line Company (Panhandle). URC is a nonoperating cotenant owner of gas wells in Oklahoma. URC, as seller, and Panhandle, as buyer, entered into a fifteen-year gas purchase and sales agreement (Agreement) in 1982. Under the Agreement, URC is required to tender for delivery a certain quantity of gas (Contract Quantity) ¹ to Panhandle at its pipeline connection. The Agreement also contains a standard "take-or-pay" clause obligating Panhandle to take gas, or pay for gas tendered for delivery but not taken. If, at the end of the Contract Year, Panhandle has not taken all the Contract Quantity, it must make deficiency payments for the difference between the Contract Quantity and the quantity actually taken. Panhandle may make up gas paid for but not taken during the succeeding five years of the Agreement. ²

URC notified Panhandle of its deficiency quantity of 92,775 Mcf of gas and deficiency amount of $708,990.23 at the end of the 1983 Contract Year, and of the deficiency quantity of 119,388 Mcf of gas and deficiency amount of $919,168.21 at the end of the 1984 Contract Year. Panhandle refused to pay the deficiency amounts. URC brought suit in state court for breach of contract and Panhandle removed the case to federal court. The United States District Court for the Northern District of Texas rendered summary judgment in favor of URC and Panhandle brought this appeal. URC appeals only the award of prejudgment interest. We now affirm.

DISCUSSION

Panhandle's issues on appeal can be grouped into three areas: (1) whether the trial court correctly held that Panhandle was not entitled to suspend performance under Tex.Bus. & Com.Code Ann. Sec. 2.609 (Vernon 1968); (2) whether the trial court correctly held that the Agreement is unambiguous and correctly interpreted the intent of the parties; and (3) whether genuine issues of material fact exist which preclude summary judgment.

1. Reasonable insecurity under Sec. 2.609

Panhandle argues that it was justified in refusing to make deficiency payments because URC failed to give adequate assurance that it had sufficient reserves to supply makeup gas in the future. After the execution of the Agreement, Panhandle conducted geological studies on the URC wells in the Fletcher Field which were dedicated to Panhandle and concluded that, based on the field reserves, specific well capabilities, and Panhandle's projected sales levels, it would be impossible for URC to supply both the Contract Quantity for the remaining term of the Agreement and makeup gas in sufficient quantities to permit full recoupment of deficiency payments. Affidavit and Supplemental Affidavit of Michael Knobloch, Record Vol. 1 at 108, 199. Panhandle then made written demand on URC for assurance that URC would either provide makeup gas or refund deficiency payments, and URC refused to give such assurance.

Article 2 of the Tex.Bus. & Com.Code Ann. (Vernon 1968), which governs the sale of goods, applies to gas purchase and sales agreements. E.g., Southern Natural Gas Co. v. Pursue Energy, 781 F.2d 1079, 1081 n. 3 (5th Cir.1986) (applying Mississippi law). Under Tex.Bus. & Com.Code Ann. Sec. 2.609 a party may suspend performance without being in breach of the contract when certain conditions exist. That section provides

(a) A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.

Before a party can suspend performance, however, he must have reasonable grounds for insecurity. The reasonableness of grounds for insecurity is determined by reference to commercial standards. Id. Sec. 2.609(b). The trial court held, ³ and we agree, that Panhandle's fears of lack of makeup gas in the future did not rise to the level of reasonable insecurity as a matter of law.

First, there was no event occurring after the execution of the Agreement which could have given rise to a reasonable insecurity. See Pittsburgh-Des Moines Steel Co. v. Brookhaven Manor Water Co., 532 F.2d 572, 581-82 (7th Cir.1976). There was no change in the reservoir capacity or in URC's ability to perform. The only "event" was Panhandle's evaluation of the Fletcher Field. Furthermore, as an experienced buyer of natural gas Panhandle is deemed to have known of the risk that it might not be able to recoup deficiency payments by taking makeup gas. Lone Star Gas Co. v. McCarthy, 605 S.W.2d 653, 656 (Tex.Civ.App.--Houston [1st Dist.] 1980, writ ref'd n.r.e.).

Second, Panhandle's alleged insecurity arose from purely subjective evaluations and projections and was not based on any objective, identifiable conduct of URC. See Cole v. Melvin, 441 F.Supp. 193, 203 (D.S.D.1977). URC properly tendered for delivery the Contract Quantity for the 1983 and 1984 Contract Years and has continuously maintained that it is willing and able to perform under the Agreement. Third, Panhandle's conclusion of insecurity is based upon some unsupported assumptions about the market for natural gas. URC's responsibility to supply makeup gas is only triggered when Panhandle has made deficiency payments in a preceding year, and Panhandle has taken the entire Contract Quantity for the year. Agreement p 4.8. Panhandle assumes that in the five years following the years in which deficiency payments are made, the demand for gas will increase to the point that Panhandle will be able to take amounts of gas over and above the Contract Quantity. In fact, the demand for gas and Panhandle's ability to take the Contract Quantity has decreased, while Panhandle's deficiency quantities increased from 1983 to 1985 when this suit was filed. Record, Vol. 1 at 186-87. Panhandle cannot ignore its own obligations under the Agreement, assume that it will be able to take the Contract Quantity and more, and then demand that URC give adequate assurance that it can perform in Panhandle's hypothetical situation.

Because Panhandle did not have a reasonable insecurity regarding URC's future performance, URC was not required to give adequate assurance and its failure to do so does not excuse Panhandle from its obligation to make deficiency payments. See Ellis Manufacturing Co. v. Brant, 480 S.W.2d 301, 303-04 (Tex.Civ.App.--Houston [14th Dist.] 1972, no writ).

2. Parties' intent

Panhandle raised several defenses which concern the parties' intent regarding the effect of the take-or-pay clause. ⁴ On appeal, Panhandle argues that the Agreement was ambiguous and parol evidence should have been admitted to show that the parties never intended to require payment for gas that URC could not supply or legally produce. For instance, Panhandle claims that its evaluations of the geologic formations underlying the Fletcher Field show that it will be physically impossible for URC to produce the Contract Quantity and makeup gas in sufficient quantities to permit full recoupment of the deficiency payments. Also, according to Panhandle's calculations, the rate of production required to meet the Contract Quantity and demand for makeup gas would violate Oklahoma conservation laws restricting production. Panhandle concludes that because the parties could not have intended to require URC to either do the impossible or violate Oklahoma law, they could not have intended to enforce the take-or-pay clause under present circumstances. Whether or not the production of makeup gas in the future would violate the Oklahoma conservation laws is purely speculation and this will not support Panhandle's position.

The trial court held that the take-or-pay provisions were...