The San Antonio Court of Appeals has sides with Marathon Oil in a dispute over payments under a joint operating agreement with 1776 Energy Partners.
1776 Energy Partners, LLC v. Marathon Oil EF, LLC (No. 04-20-00304-CV; delivered March 29, 2023) arose from 1776’s failure to pay certain joint interest billing states (JIBs) related to three joint operating agreements, two of which were operated by Marathon and one by 1776. 1776’s financial troubles stemmed from unrelated litigation in which the trial court imposed a constructive trust on its assets. For more than two years Marathon worked unsuccessfully with 1776 to resolve the payment problems and resorted both to netting and cross-netting to retire the outstanding debts (the parties disagreed about whether each JOA gave Marathon authority to crossnet revenues from the other two). Eventually, Marathon decided to drill three new wells on the contract area covered by one of the JOAs operated by Marathon and made a “cash call” to working interest owners to pay their proportionate shares of the upfront drilling and completion costs. At that time 1776 owned a 64% working interest in that area, Marathon 20%. Under the JOA, the costs assigned to 1776 came to about $9.4 million. 1776 elected to participate but could not make the $9.4 million payment without outside financing. After considerable negotiation and back-and-forth, 1776 couldn’t raise the money, resulting in Marathon dividing up 1776’s interest among the other working interest owners (which increased Marathon’s share to 55%).
The parties proceeded to the courthouse. Marathon got there first, asserting a declaratory judgment action declaring 1776’s non-consent to the new wells and breach of contract claims for 1776’s failure to make required payments under all three JOAs. 1776 counterclaimed, likewise asserting declaratory judgment and breach of contract claims. 1776 argued that Marathon’s failure to assure 1776’s outside investments that it would not use any of the $9.4 million to crossnet 1776’s debts constituted a repudiation and anticipatory breach of the JOA. It also alleged that Marathon’s cross-netting breached the JOA. Marathon moved for summary judgment on its breach of contract claim and 1776’s counterclaims, upon which 1776 amended its counterclaim to allege fraud by nondisclosure, alleging that Marathon proposed the new wells for the purpose of tricking 1776 out of its working interest (though Marathon did drill the wells). The trial court granted partial summary judgment to Marathon on its breach of contract claim and went to trial on the remaining claims. After the parties rested, the trial court granted Marathon a directed verdict on 1776’s fraud by nondisclosure claim but returned the favor by directing a verdict against Marathon on 1776’s declaratory judgment action asserting that the JOA did not require 1776 to pay outstanding debts on other JOAs in order to participate in the new wells. What was left went to the jury, which poured out 1776 and made findings on both sides’ attorney’s fees. The trial court rendered judgment for Marathon for about $2.3 million. 1776 appealed.
The court of appeals reversed the trial court’s directed verdict in favor of 1776 on its declaratory judgment claim and affirmed as to all other issues. 1776 asserted numerous issues, which the court patiently disposed of in a nearly 50-page opinion. Here is a brief summary of the action:
- The trial court erred in directing a verdict for 1776 in the declaratory judgment action because 1776 never paid the required “cash call.” When it failed to do so, any discussion of Marathon’s additional obligations under the JOA became hypothetical. 1776 thus had no justiciable interest that could be determined by the court. The trial court thus lacked jurisdiction to grant a declaratory judgment action.
- 1776 attacked the summary judgment on several grounds, most of which quibbled with the damages findings, Marathon’s employee’s affidavit in support of summary judgment, whether the trial court properly offset revenues owed to 1776 against its debt. Here, the court noted that 1776, in its response to Marathon’s motion for summary judgment, requested a setoff, but then argued to the court of appeals that the set off was improper and Marathon failed to prove up its right to a setoff. Pointing out that a “party cannot complain on appeal that the trial court took a specific action that the complaining party requested,” the court of appeals didn’t go for it. The court further observed that the right to setoff is an affirmative defense to a breach of contract claim, not something the plaintiff (Marathon) has to establish as part of its claim. Finally, 1776 argued that the trial court erred by denying its motion to reconsider summary judgment, which is made after evidence at trial.
- In another issue, 1776 argued that the trial court erred by denying leave to file a third amended petition alleging conversion and a new breach theory as to cross-netting after the docket order closed discovery. In this situation, generally “the trial court must grant leave to amend unless: (1) the opposing party shows evidence of surprise or prejudice; or (2) the amendment is prejudicial on its face and the opposing party objects to the amendment” (citations omitted). Marathon objected that the proposed amendment was prejudicial because it “(1) assert[ed] a new substantive matter which reshapes the nature of the trial; (2) [was] of such a nature that it could not have been anticipated in light of the development of the case up until the time of amendment; and (3) would detrimentally affect the opposing party’s presentation of its case” (citation omitted). The court of appeals agreed, finding that it could not second-guess the trial court’s discretion to deny leave to amend because the court could reasonably have concluded that the parties had already litigated those issues and that the trial court had already decided them in favor of Marathon.
- The court likewise rejected 1776’s challenge to the trial court’s directed verdict for Marathon on the fraud by nondisclosure claim. 1776 alleged that more than a scintilla of evidence existed to show that Marathon failed to disclose that it did not intend to drill the wells (though it did), had a duty of disclose that fact, knew that 1776 had no equal opportunity to discover that intent, and intended to induce 1776 to act or refrain from acting, resulting in damages. The court held that 1776 failed to raise a fact issue on any of the elements of the cause of action. Since 1776 never paid the “cash call” to begin with, it could hardly complain about the reasons Marathon might have wanted to drill the new wells. The evidence also indicated that 1776 and its outside investors knew all about the facts of Marathon’s cash call. Finally, again, since 1776 did not pay the “cash call,” it could not subsequently claim any lost revenues that may have resulted from nonparticipation in the new wells.
1776 asserted several other issues, none of which persuaded the court of appeals. As a final blow, the court found the evidence legally and factually sufficient to support the trial court’s attorney’s fee award of nearly $700,000. It did remand to the trial court on the issue of whether 1776 was entitled to any attorney’s fees on the parties’ remaining UDJA claims, though given the thorough dismantling of 1776’s case by this point, one wonders what those might be.
Two things jump out to us in this case: the extraordinary weakness of 1776’s claims and, probably as a consequence of that weakness, the extraordinary number of issues 1776 threw against the wall in the court of appeals in hopes of something, anything sticking. It also demonstrates the extraordinary professionalism of the San Antonio Court of Appeals in dignifying those claims in a well-reasoned legal analysis that reveals the full extent of those difficulties without the slightest show of impatience. But, in our view, it would not be a good idea to try that patience again.
