Lario Oil & Gas Co. v. Black Hawk Energy Serv.

690 S.W.3d 404

LARIO OIL & GAS COMPANY, Appellant

v.BLACK HAWK ENERGY SERVICES, LTD. and Steel Energy Services, Ltd.,¹ Appellees

Black Hawk Energy Services, Ltd., Cross-Appellant

v.Lario Oil & Gas Company, Cross-Appellee

No. 11-22-00230-CV

Court of Appeals of Texas, Eastland.

Opinion filed May 9, 2024

On Appeal from the 238th District Court, Midland County, Texas, Trial Court Cause No. CV54669

John T. Wilson IV, Dallas, Stephanie L. Perry, Midland, Matthew D. Stayton, for Appellant.

James W. Essman, Odessa, Jason B. Hamm, Midland, Rick G. Strange, J. J. Knauff, Dallas, Natasha Taylor, Houston, for Appellee Steel Energy Services, LTD.

J. J. Knauff, Dallas, Jason B. Hamm, Midland, Eric Boettcher, Natasha Taylor, Houston, James W. Essman, Odessa, Rick G. Strange, for Appellee Black Hawk Energy Services LTD.

Panel consists of: Bailey, C.J., Trotter, J., and Williams, J.

OPINION

W. BRUCE WILLIAMS, JUSTICE

In this breach-of-contract case, Appellant, Lario Oil & Gas Company, challenges a jury award of "$0.00" in damages where downhole oilfield pipe separated, pipe and equipment fell into the well, and an expensive "fishing" operation was required to retrieve them. Lario additionally appeals the counterclaim award in favor of Appellee, Black Hawk Energy Services, Ltd., for disputed and unpaid invoices. Lario claims that Black Hawk breached their Master Service Agreement (MSA) first, and that Lario did not thereafter breach the contract because a "bona fide dispute" existed, which contractually excused Lario’s payment of Black Hawk’s invoices. Black Hawk has filed a conditional cross-appeal, alleging that, within the terms of the MSA, Lario released Black Hawk from all claims arising out of or related to property damages—which encompassed all of Lario’s alleged damages.

Because we conclude that the jury award of, "$0.00" in damages to Lario is neither arbitrary nor against the great weight and preponderance of the evidence, and that the jury could have fairly and reasonably determined that no bona fide dispute existed that could excuse Lario’s nonpayment of the invoices, we affirm the judgment of the trial court.

Factual and Procedural History

In December 2016, Lario and Black Hawk entered into an MSA to govern the scope of all future work together. Some months later, Lario hired Black Hawk to perform a workover job on the Peggy 101 Well—a routine electric submersible pump (ESP) pull. The purpose of the workover job was to pull and replace an ESP. When there are no complications, a typical work- over job can be completed within three to five days. Black Hawk, as the contractor for the job, was responsible for hiring their own crew, managing the crew, and providing the necessary equipment for the work-over job.

Black Hawk began the workover job on May 8, 2017. That day, there were challenges with "killing" the well—or neutralizing the downhole pressure of the well to make it safe to perform the contracted work. The next day, after the well had been "killed," Michael Serrano, the tool pusher for Black Hawk, performed a function test for the blowout preventer (BOP). Following a successful test of the BOP, the Black Hawk team on site met with the Lario "company man," Mark Cochran, for a safety meeting.

Cochran told Serrano and the Black Hawk team that hydrogen sulfide gas (H2S) was possibly present in the well, and that it could cause pipe corrosion, meaning that the Black Hawk team was to look for "bad pipe" or holes in the pipe—also commonly referred to as "tubing." As Black Hawk was pulling the pipe, they discovered pinholes in the 94th and 114th pipe joints. Each time that the crew discovered pinholes in a joint of pipe, Black Hawk informed Cochran, the joint was pulled, and the crew then resumed pulling joints of pipe out of the well. The string of tubing parted at the 116th joint, causing the ESP to break, the joint to separate, and the ESP and pipe to fall into the hole.

The well workover was shut down that day after the incident. Ismael Garcia, a safety coordinator for Black Hawk at the time of the incident, indicated that when an incident occurs, the regular procedure is to have an investigation into the incident—which includes drug testing for the Black Hawk employees involved. The employees took drug tests that day and returned to work the next day, pending the results of the drug tests. The Black Hawk crew was informed that if an employee were to test positive on the "instant" test, they were to be placed on leave until the lab results were returned, and, if the latter result was also positive, their employment termination would be backdated to the date of the instant positive test. In this case, three of the eight Black Hawk employees involved tested positive for cocaine and were terminated.

Following the incident, Lario hired Kenneth Young, a consultant experienced in "fishing" pipe and equipment out of wellbores. Young was employed with Key Energy at that time, was well-known for his fishing job experience, and had worked with Cochran and Lario previously. Young first worked with the original Black Hawk crew. He described them as nervous and a "little jittery." After approximately one week, a new Black Hawk crew started and Young felt that the new team did an "excellent job" and had "very, very good knowledgeable hands." The Black Hawk team continued working on the fishing operation until September 2017, and Young testified that he would have been happy to work with them until the completion of the project in March 2018.

During the time that Black Hawk worked on the original workover project and the fishing operation, Cochran—or another Lario representative—signed daily work logs for the work completed by Black Hawk. These work logs were then submitted to Lario with an invoice. There were seven different invoices from May 2017 to September 2017. The total for all seven invoices amounted to $825,292.49. Lario refused to pay the invoices, claiming that Black Hawk had caused the incident and the fishing work to be done, thereby creating an alleged "bona fide dispute" under the terms of the MSA.

At trial, there was testimony presented that, those joints of pipe retrieved from the hole that had developed pinholes would have been removed from the well’s string of tubing, even if the pipe had not failed, because those joints had been compromised. Black Hawk’s forensic and petroleum engineering expert witness, David Watson, testified that there had been extreme corrosion inside the tubing (pipe) compromising the integrity and strength of the string of pipe and thread connections. According to Watson, the corrosion caused the separation of the pipe that was involved in the incident and the subsequent "fishing" operation. Watson additionally testified that the BOP did not cause or contribute to the separation of the pipe or the damage to the pipe.

Jury question Nos. 1–4 and the jury’s answers to those questions are the source of the legal contentions between the parties on appeal. They were worded as follows:

Question 1: Did Black Hawk fail to comply with the MSA?

Answer: "Yes."

Question 2: Did Black Hawk fail to comply with any warranty or representation expressed in the MSA, and was that failure a proximate cause of Lario’s damages? (The definition of "proximate cause" was provided.)

Answer: "Yes."

Question No. 3: What sum of money, if paid now in cash, would fairly and reasonably compensate Lario for its damages that resulted from Black Hawk’s failure to comply with the MSA?

Consider the following elements of damages, if any, and none other:

The reasonable and necessary cost to finish the uncompleted work. Answer in dollars and cents, if any. Do not add any amount for interest on damages, if any.

Answer: "$0.00"

Question No. 4: Did the negligence of Black Hawk proximately cause the damage to Lario’s Property in question? (The definitions of "negligence," "ordinary care" and "proximate cause" were provided). Answer "Yes" or "No."

ANSWER: "No."

Following the presentation of evidence, a jury rendered a verdict in favor of Black Hawk and against Lario. The judgment signed by the trial court ordered that Lario take nothing from Black Hawk or Steel, and that Black Hawk recover actual damages in the amount of $825,292.49; prejudgment interest on actual damages awarded in the amount of $157,837.19; reasonable and necessary attorney’s fees in the amount of $74,425.00; court costs as provided by law; and post-judgment interest at the rate of 5% per annum, compounded annually on the sum $983,129.68 from the date of judgment until paid. This appeal by Lario followed, and Black Hawk filed a conditional cross-appeal. We first address Lario’s issues on appeal.

Issues One and Two: Legal and Factual Sufficiency

Lario’s first and second issues on appeal are related. First, Lario makes a legal sufficiency challenge, arguing that the jury’s award of "$0.00" was arbitrary, because the jury found that Black Hawk failed to comply with the MSA and that Black Hawk’s breaches of the MSA "proximately caused" Lario damages. Second, Lario makes an alternative factual sufficiency challenge, arguing that the jury’s award of $0.00 was against the great weight and preponderance of the evidence because there was objective and undisputed evidence of economic injury to Lario. We address each in turn.

A. Legal Sufficiency

[1–3] Under a legal sufficiency review, we consider all of the evidence in the light most favorable to the prevailing party, make every reasonable inference in that party’s favor, and disregard contrary evidence unless a reasonable factfinder could not. City of Keller v. Wilson, 168 S.W.3d 802, 807, 822, 827 (Tex. 2005). "When a party attacks the legal sufficiency of an adverse finding on an issue on which it bears the burden of proof, the judgment must be sustained unless the record conclusively establishes all vital facts in support of the issue." Shields Ltd. P’Ship v. Bradberry, 526 S.W.3d 471, 480 (Tex. 2017) (citing Mo. Pac. R....