Jatex Oil & Gas Exploration L.P. v. Permian

629 S.W.3d 397

JATEX OIL AND GAS EXPLORATION L.P., John A. Truitt, Inc., and John A. Truitt, Appellants

v.NADEL AND GUSSMAN PERMIAN, L.L.C. and Scott Germann, Appellees

No. 11-17-00265-CV

Court of Appeals of Texas, Eastland.

Opinion filed August 20, 2020

William E. Berry Jr., Samuel J. Stennis, Matthew J. Coolbaugh, Midland, for Appellees.

Russell R. Barton, James E. Key, Fort Worth, Michael K. Reer, for Appellants.

Panel consists of: Bailey, C.J., Stretcher, J., and Wright, S.C.J.¹

OPINION

JOHN M. BAILEY, CHIEF JUSTICE

This appeal arises from a dispute between a working interest owner and the operator of an oil and gas development known as the Clyde Prospect, which is in Glasscock County. Appellant Jatex Oil and Gas Exploration L.P. is the aggrieved working interest owner. Jatex, joined by its general partner, John A. Truitt, Inc. (Truitt, Inc.), and the principal of both entities, John A. Truitt (Truitt), filed suit against Appellees, Nadel and Gussman Permian, L.L.C. (NGP) and NGP's general manager, Scott Germann. Appellants asserted causes of action for breach of contract, failure to act as a reasonably prudent operator, and tortious interference with a contract. The trial court granted summary judgment in favor of Appellees on all of Appellants’ claims. Appellants bring two issues on appeal. We affirm.

Background Facts

Truitt is a petroleum geologist. He alleged that, in 2008, he acquired three leases covering approximately 8,000 acres in Glasscock County known as the Clyde Prospect. He further alleged that he sold the prospect to NGP, retaining a 6.25% working interest in favor of Jatex. In 2010, Jatex and the other working interest owners executed a joint operating agreement that named NGP as the operator of the prospect area. Appellants premise their causes of action for breach of contract and failure to act as a reasonably prudent operator on NGP's alleged breach of the joint operating agreement.

On October 27, 2011, Jatex executed a promissory note to Security Bank for a "reducing revolving line of credit" in the maximum amount of $3,000,000. Jatex pledged as collateral to the bank its mineral interests in the Clyde Prospect as well as other mineral interests owned by Appellants. The 2011 note required monthly payments due on the 28th of each month with a final maturity date of October 28, 2015. Truitt, Inc. and Truitt were guarantors of the note.

Appellants were in default on the 2011 note for several months. Security Bank's attorney sent the first default notice on August 26, 2013. In the initial notice, Security Bank demanded a payment of $497,470.70 by September 26, 2013. Security Bank sent subsequent default notices on the 2011 note as follows:

Date of Default Notice	Payoff Balance	Proposed Foreclosure Date
October 23, 2013	$2,333,411.91	(none)
December 13, 2013	$2,335,346.31	January 7, 2014
February 10, 2014	$2,356,440.86	March 4, 2014
March 11, 2014	$2,074,120.24	April 1, 2014
May 12, 2014	$2,012,889.04	June 3, 2014

Appellants executed a new note on May 27, 2014, in the amount of $1,996,826.94. Appellants attached a copy of it to their petition. It was a "term promissory note" that provided for five monthly installments of "one hundred percent (100%) of [Appellants’] Oil and Gas Proceeds [as defined in the note]" beginning on June 27, 2014, and continuing until November 27, 2014, when the remaining unpaid balance "on this Note shall be due and payable."

Security Bank sent its final (seventh) notice of default on December 10, 2014. The bank asserted in this notice that the 2014 note "became fully due on November 27, 2014," and that Jatex owed the bank $1,928,617.63 under the note. The final notice listed a proposed foreclosure date of January 6, 2015. Security Bank foreclosed upon Appellants’ mineral interests on January 6, 2015, by purchasing the pledged mineral interests for $1,500,000.

The principal event giving rise to Appellants’ claims was NGP's proposal in May 2014 to deepen the Vaqueros 47 No. 1 Well. Appellants asserted that, under the joint operating agreement, a written consent election was required to include a nonoperator in a proposed drilling operation. Appellants contend that NGP improperly included Jatex in the project and erroneously assessed charges to Jatex's account because Jatex did not make a written election to participate in the project. Appellants asserted that this action of improperly billing Jatex's account constituted a breach of the terms of the joint operating agreement. Appellants contend that NGP's improper billing caused Security Bank to foreclose on the mineral interests owned by Appellants that had been pledged as collateral by Appellants. Appellants also asserted that the alleged improper billing by NGP constituted tortious interference with contracts that Appellants had with the bank.

Appellees filed a combined no-evidence and traditional motion for summary judgment. Appellants filed a response to the summary judgment motion that included an unsworn declaration executed by Truitt. See TEX. CIV. PRAC. & REM. CODE ANN. § 132.001 (West 2019). Truitt's declaration included an exhibit wherein he expressed an estimate of the fair market value of the mineral interests foreclosed upon by the bank. Appellees filed a motion to exclude Truitt's economic evaluation of the fair market value. The trial court granted the motion to exclude Truitt's economic evaluation. This evidentiary ruling is the basis of Appellants’ first issue. The trial court also granted Appellees’ motion for summary judgment. In their second issue, Appellants challenge the summary judgment.

Analysis

We review the trial court's grant of summary judgment de novo. Lujan v. Navistar, Inc. , 555 S.W.3d 79, 84 (Tex. 2018) (citing Provident Life & Accident Ins. Co. v. Knott , 128 S.W.3d 211, 215 (Tex. 2003) ). However, a trial court's decision to exclude or admit summary judgment evidence is reviewed for an abuse of discretion. Id. (citing Starwood Mgmt., LLC v. Swaim , 530 S.W.3d 673, 678 (Tex. 2017) ). Accordingly, Appellants’ first issue requires us to determine if the trial court abused its discretion when it struck Truitt's valuation testimony. See id. ; Sw. Energy Prod. Co. v. Berry-Helfand , 491 S.W.3d 699, 727 (Tex. 2016) (A trial court's evidentiary rulings are reviewed for abuse of discretion.). An abuse of discretion exists only when the trial court's decision is made without reference to any guiding rules and principles. U-Haul Int'l, Inc. v. Waldrip , 380 S.W.3d 118, 132 (Tex. 2012). "An appellate court must uphold the trial court's evidentiary ruling if there is any legitimate basis for the ruling." Owens-Corning Fiberglas Corp. v. Malone , 972 S.W.2d 35, 43 (Tex. 1998).

Motion to Strike Truitt's Valuation of Mineral Interests

In their initial designation of experts, Appellants designated Truitt as an expert. The designation provided that Truitt "may testify as to the value of the [working interests] and [overriding royalty interests] held under the Deed of Trust which was lost to Security Bank." Appellants subsequently filed an amended designation of experts that omitted Truitt as an expert. Appellants filed this amended designation approximately one year prior to Truitt's deposition.

One month after Truitt's deposition, Appellants filed their response to Appellees’ motion for summary judgment. Appellants’ response included Truitt's declaration wherein he gave an estimate of the fair market value of the mineral interests that were foreclosed upon by the bank. Truitt stated his evaluation as follows:

I am a degreed Petroleum geologist with numerous petroleum engineering courses and classes. Began my oil and gas career with Marathon Oil Company in 1983. Formed JATEX Oil & Gas Exploration, LP in 1983. I have over thirty-four years generating, evaluating and selling prospects and projects in the Permian Basin. My experience in the areas under the bank agreements is extensive. Most of the properties lost were discoveries made productive by my local expertise.

Fair Market value is the price a willing buyer will pay and a willing seller will accept for a property, when the property is exposed to the market for a reasonable period of time, and neither party has any compulsion to buy or sell, and both being knowledgeable of the pertinent facts. The property was purchased by the bank from the bank within days of foreclosure to eliminate exposure to a competitive market. The collusion price was well below the banks own PDP value for the properties.

The value generated in Mr. Patterson's² report is by his own admission ... incomplete, addressed just a few of the wells for PDP value only and is therefore unreliable at best. Mr. Lee³ attempted to include most of the properties and wells. In my opinion Mr. Lee's report was generated for a third party and represent[s] a more accurate presentation between the two. Both reports fall short of a full economic evaluation of the properties. The Society of Petroleum Evaluation Engineers (SPEE) in their publication Elements of a Reserve and Resource [R]eport state that a proper report should include values for PDP, PDNP, PDBP, PUD and Probable. Neither report included any value for behind pipe potential (PDNP), proven undeveloped locations (PUD) or probable locations.

Cawley, Gillespie & Associates, Inc. is an engineering evaluation firm well respected in the oil and gas industry. The NYMEX STRIP price that they were using December 1, 2014 represents a fair assumption and was nearest the time of foreclosure. The numbers are similar to those used by Mr. Lee to establish his PDP value and below Nadel's September 2014 actual sales dollars. The properties under the bank agreement represented over 18,000 gross acres with stacked pay zones for both oil and gas. They would be classified as PUD and probable locations. Prices for acreage in the Permian for similar acreage with sta[c]ked pays have averaged $15,000-$20,00 [sic] per acre. A conservative $ 5,000 per net acre was used in this report. The

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