Valero Transmission Co. v. Mitchell Energy Corp.

• Court: Texas Court of Appeals
• Writing for the Court: Before EVANS; EVANS
• Citation: Valero Transmission Co. v. Mitchell Energy Corp., 743 S.W.2d 658 (Tex. App. 1987)
• Decision Date: 31 August 1987
• Docket Number: No. 01-87-00137-CV,01-87-00137-CV
• Parties: VALERO TRANSMISSION COMPANY, Appellant, v. MITCHELL ENERGY CORPORATION, Appellee. (1st Dist.)

Page 658

743 S.W.2d 658

VALERO TRANSMISSION COMPANY, Appellant, v. MITCHELL ENERGY CORPORATION, Appellee.

No. 01-87-00137-CV.

Court of Appeals of Texas Houston (1st Dist.).

Aug. 31, 1987.

Rehearing Denied Jan. 14, 1988.

J. Clifford Gunter, III, Carrin F. Patman, Michael G. Cosby, Gregory C. King of Bracewell & Patterson, Houston, for appellant.

George W. Lederer, Jr., Jack O'Neill, Houston, for appellee.

Before EVANS, C.J., and COHEN and HOYT, JJ.

EVANS, Chief Justice.

Valero Transmission Company ("Valero"), a natural gas pipeline company, appeals from a temporary injunction order requiring that it purchase and take, pending a trial on the merits, certain quantities of gas from Mitchell Energy Corporation ("Mitchell"), a gas producing company, pursuant to its gas purchase agreement with Mitchell.

In the temporary injunction order, the trial court found that on March 21, 1975, Mitchell and Valero entered into a gas purchase contract that as amended, has a contract term of 20 years from February 1, 1981. The court found that under the provisions of this contract, Valero agreed to:

(i) exercise its best efforts in good faith, and in cooperation with [Mitchell], to request deliveries of gas that will maintain [Mitchell's] leases in force and effect; and to

(ii) actually purchase from [Mitchell] quantities of gas sufficient to permit [Mitchell] to prevent drainage of gas from [its] leases by producers other than [Mitchell].

The court found that Valero breached these agreements, and that as a result, Mitchell's leases in three fields subject to the contract were being drained by offsetting producers. The court found that as a further result of the breach, Mitchell was in imminent danger of losing 11 leases that were subject to the gas purchase contract.

Based on the foregoing findings, the court required that Valero, pending a final hearing on the merits, do the following:

(i) To prevent drainage of gas from Mitchell's leases, Valero is required to purchase and take gas from designated wells "in an amount equal to the full prorated allowable assigned to each such well by the Railroad Commission of Texas [but not more gas than a particular well is physically capable of producing]"; and

(ii) To prevent Mitchell from losing its leases, Valero is required to purchase and take from designated wells "the amount of gas which each such well can physically produce in one day, [but not to exceed the prorated allowable assigned to such well]." Valero is further required to make any necessary nominations to the Texas Railroad Commission so that its purchases and takes under this paragraph ... will not cause Valero to violate Texas law.

Under the gas purchase contract, Mitchell dedicated exclusively to Valero all of its gas reserves in designated lands and leases in several counties. Mitchell agreed to sell and deliver to Valero, and Valero agreed to purchase and take, all gas produced from said lands and leases during the 20-year term of the contract. The contract specifies the quantities, quality, and prices to be paid for the gas, and contains clauses designed to protect Mitchell against drainage and against the loss of its leases because of lack of production. The contract also contains a force majeure clause and a provision that the contract is deemed to be modified by any contrary Texas law. The contract was amended in 1978 to include additional acreage, and again in 1981, when Mitchell agreed to drill 15 additional wells in return for a higher price per unit for gas produced from the new wells.

Beginning in 1983, Valero no longer complied with the minimum purchase and take requirements of the gas purchase contract, and thereafter, Mitchell brought suit alleging breach of contract. Ancillary to the main action, Mitchell sought a temporary injunction, which is the subject of this appeal.

We first address Valero's contention that the trial court lacked subject matter jurisdiction to enter the temporary injunction. Valero contends that Mitchell's suit constitutes a collateral attack on the rules, regulations, and orders administered by the Texas Railroad Commission, and that the district courts of Travis County have exclusive jurisdiction to hear such suits. See Alpha Petroleum Co. v. Terrell, 122 Tex. 257, 59 S.W.2d 364 (1933); Tex.Nat.Res.Code Ann. sec. 85.241 (Vernon 1978).

We overrule Valero's contention. Mitchell's suit was for breach of contract, and its action for a temporary injunction merely sought to compel Valero's continuing performance of certain terms of the gas purchase contract pending a trial on the merits. Mitchell's suit does not challenge or seek an exemption from any rule, regulation, or order of the Texas Railroad Commission. Although the Texas Railroad Commission is given general statutory authority to regulate the production of gas, the Commission does not have authority to hear contract disputes or to abrogate the parties' respective rights under the gas purchase contract. See Railroad Comm'n v. City of Austin, 524 S.W.2d 262 (Tex.1975); see also Humble Oil & Refining Co. v. Railroad Comm'n, 133 Tex. 330, 128 S.W.2d 9 (1939); Railroad Comm'n v. United Gas Pipe Line Co., 358 S.W.2d 907 (Tex.Civ.App.--Austin 1962, writ ref'd n.r.e.); A. Anderson, The Texas Approach to Gas Proration and Ratable Take, 57 U.Colo.L.Rev. 199, 220-21 (1986). Indeed, the Texas Railroad Commission, in adopting 16 Tex.Admin.Code secs. 3.30, 3.34 (1987), has itself expressly acknowledged that these rules "shall not affect existing contractual rights and obligations between parties." 12 Tex.Reg. 536 (February 17, 1987).

Mitchell sought temporary specific performance of certain terms of a contract, pending a trial on the merits, and such suit could properly be determined by the district court of Harris County, notwithstanding the fact that the parties are generally subject to the regulatory authority of the Railroad Commission. We accordingly hold that the trial court has subject matter jurisdiction over this contract dispute and over Mitchell's ancillary action for temporary injunction. See Zimmerman v. Texaco, Inc., 413 S.W.2d 387 (Tex.1967), refusing writ n.r.e. on 409 S.W.2d 607, 612-13 (Tex.Civ.App.--El Paso 1966); Looney v. Sun Oil Co., 170 S.W.2d 297, 300 (Tex.Civ.App.--Texarkana 1943, writ ref'd).

We therefore overrule Valero's seventh point of error.

We next consider Valero's contentions that the trial court abused its discretion in granting the temporary injunction. The purpose of a temporary injunction is to preserve the status quo, and one seeking such relief must show a probable right to recover on the merits at the eventual trial, irreparable injury in the interim if the injunction is not granted, and the absence of an adequate remedy at law. Arkansas Louisiana Gas Co. v. Fender, 593 S.W.2d 122, 123 (Tex.Civ.App.--Tyler 1979, no writ). Valero contends that Mitchell failed to sustain its burden of showing these elements.

In its first point of error, Valero asserts that Mitchell failed to demonstrate a probable right to recover under the provisions of the gas purchase contract. Under this point, Valero argues that it has taken gas under the contract in accordance with its market demand and that any contractual requirement that it purchase additional amounts would constitute a violation of Texas law. In addition, Valero contends that Mitchell failed to present evidence of probative value showing that it would sustain damages from Valero's failure to take minimum quantities of gas. In its related point of error nine, Valero asserts that the temporary injunction order requiring performance of the contract, as written, violates the law and is therefore void and unenforceable.

A trial court is clothed with broad discretion in deciding whether to issue a temporary injunction to preserve the rights of the parties pending a final trial on the merits. Texas Foundries, Inc. v. Int'l Moulders & Foundry Workers' Union, 151 Tex. 239, 248 S.W.2d 460 (1952). On review of a temporary order, a trial court's decision will be reversed only if the record shows a clear abuse of discretion. Id. 248 S.W.2d 460 at 462; see Davis v. Huey, 571 S.W.2d 859 (Tex.1978).

Thus, in reviewing the temporary injunction order, we are not permitted to decide questions of factual insufficiency or reach the underlying merits of the case. Id. at 861-62. Nor may we substitute our judgment for that of the trial court. Indeed, we must draw all reasonable inferences in favor of the trial court's decision. Davis v. Bache Halsey Stuart Shields, Inc., 630 S.W.2d 754, 757 (Tex.App.--Houston [1st Dist.] 1982, no writ).

We first conclude that the contract, and the temporary injunction order enforcing it, is not illegal on its face, so that Valero had the burden of demonstrating its defense of illegality. We may find an abuse of discretion in the trial court's holding against Valero only if illegality was established as a matter of law.

Valero's claim of illegality is based upon the premise that there was no market demand for the gas Valero contracted to purchase from Mitchell. Valero argues that a market for gas is defined by price; that the price at which it would have to sell contract gas, based on its cost, is over $4 per unit; that currently natural gas is selling on the spot market for under $2 per unit; and thus, there is no existing market for $4 gas. Valero contends that any contractual requirement that it take and pay for gas in excess of its market demand violates the law.

The Texas Railroad Commission has statutory jurisdiction to govern and regulate all oil and gas wells, common carrier pipelines, persons owning or operating pipelines, and persons owning and operating oil and gas wells in Texas. See Tex.Nat.Res.Code Ann. sec. 81.051 (Vernon 1978). However, as discussed above, the Railroad Commission has no authority to abrogate contract rights. Nor do the Railroad Commission rules purport to affect contract rights. 12...