The Texas Supreme Court has granted a pipeline company’s petition for review of a Houston [1st] Court of Appeals split decision affirming a $6.1 million judgment against the company for breach of contract.
American Midstream (Alabama Intrastate), LLC v. Rainbow Energy Marketing Corporation (No. 01-20-00055-CV; No. 23-0384; granted October 18, 2024) arose from a dispute over the terms of a contract between Rainbow, a natural gas trading company, and American Midstream, which owns the Magnolia pipeline. Located in Alabama, the Magnolia pipeline connects to a larger Transco pipeline connecting Texas to Pennsylvania. Relevant to this case is the fact that a bottleneck exists just west of the Magnolia pipeline’s connection to the Transco pipeline. At the other end of the pipe, Magnolia connects Transco to the Tennessee Gas pipeline and the Southcross pipeline. In 2014 Rainbow first contracted with American to transport natural gas on the Magnolia pipeline (MAG-0001). This contract provided for the firm transportation of 25,000 MMBtu of gas through the pipeline. Seeking to meet increasing demand from its customers, Rainbow entered into a second contract with American (MAG-0005), under which Rainbow could transport up to 20,000 MMBtus of gas each day on the Magnolia pipeline. The contract identified the Magnolia-Transco interconnect as both the primary receipt point and the delivery point for the gas.
The MAG-0005 contract provided Rainbow with so-called “balancing services” or “park and loan” services. This allowed Rainbow to make a daily delivery nomination of up to 20,000 MMBtu without a corresponding receipt nomination (and vice versa), provided that all of its deliveries and receipts reconciled or “balanced” at the end of the month. Specifically, the contract provided that “Shipper [Rainbow] shall not be obligated to balance receipts and deliveries of gas on a daily basis unless, on or for any Day, either Transporter [American] or Shipper is requested or required by an upstream or downstream party to balance receipts and deliveries of gas attributable to Shipper. If Transporter is requested or required by an upstream or downstream party to balance receipts or deliveries of gas that are attributable to Shipper, Transporter may cease receiving gas from or delivering gas to or for Shipper until the upstream or downstream party no longer requests or requires Transporter to balance receipts and deliveries of Shipper’s gas.” The contract commenced on March 1, 2015, and Rainbow initially used the contract to make daily trades, rather than “expanding its forward sale commitments,” which were currently supplied by MAG-0001.
The trouble begain when on January 8, 2016, American advised Rainbow to limit imbalances and began, on certain days, to limit Rainbow’s nomination. American informed Rainbow that it had to do so because of “Operational Flow Orders” (OFOs) from Transco stemming from the bottleneck at the Magnolia-Transco interconnect. This occurred several times in January because, according to American, Transco “began policing imbalances at the Magnolia-Transco interconnect more strictly than it had in previous years.” Consequently, Rainbow continued to use MAG-0005 for daily trades rather than forward sales contracts. When Rainbow’s nominations were again curtailed in February, the parties conferred over the problems with Transco. These conversations continued through the summer of 2016, but by the fall of that year, American once more informed Rainbow to limit imbalances on three occasions. This led to a December 7, 2016 call on which American backed away from the 20,000MMBtu “firm” commitment and began instead to refer to the agreement as “interruptible.” Negotiations continued, but Rainbow made its last nominations in January 2017 and on February 1, 2017 notified American that it was terminating MAG-0005. Rainbow stopped making monthly demand payments under the contract and made no further nominations. Rainbow filed suit against American for breach of contract,, repudiation, fraud, and negligent misrepresentation, seeking lost profits based on its inability to make the forward sales contracts it intended when it entered into MAG-0005. American counter-sued for breach of contract based on Rainbow’s cessation of monthly demand payments.
After a bench trial, the trial court ruled in favor of Rainbow on all claims except attorney’s fees. The court determined that MAG-0005 entitled Rainbow to up to 20,000MMBtu per day and that American breached the contract each time it limited Rainbow’s nominations. The court found that although MAG-0005 permitted American to do so under certain conditions (as stated in the provision quoted above), those conditions never occurred. Based on its interpretation of the contract, the court further found that American repudiated the contract when it stated that MAG-0005 was “interruptible,” not firm, and further that American recklessly and fraudulently entered into the contract knowing that it could not provide on demand the 20,000MMBtu it promised. The court denied Rainbow’s claim for attorney’s fees, however, since at the time the lawsuit was filed § 38.001, CPRC, did not permit recovery of attorney’s fees against an LLC. Finally, the court rejected American’s counterclaim. The court awarded more than $6.1 million bassed on Rainbow’s lost-profits model, which assumed that Rainbow would have entered into more lucrative forward sales contracts if it could have relied on American’s delivery of 20,000MMBtu per day. American appealed.
In an opinion by Justice Hightower and joined by Justice Kelly, the court of appeals affirmed. In a 69-page (somewhat repetitive) opinion, the court concluded that the trial court’s interpretation of the contract was the correct one and that American presented no evidence of the existence of the conditions that entitled it to curtail Rainbow’s nominations. The majority also accepted the validity of Rainbow’s lost profits model and affirmed the trial court’s judgment as to damages, as well as to more than $449,000 in prejudgment interest.
Justice Farris (now a justice on the statewide 15th Court of Appeals) dissented. In an opinion that cut right to the chase, she picked apart the trial court’s interpretation of the contract, concluding that the trial court, in contravention of Texas law, “re[wrote] [the] agreement[] to insert provisions parties could have included” but chose not to do so. Specifically, in its amended findings of fact and conclusions of law, the trial court “inserted” new language that did not appear in the relevant provision of the contract. Whereas the contract stated that American could be excused from providing firm balancing services to Rainbow if Transco requested or required American to balance “receipts and deliveries,” the trial court revised the language to read to apply only to balancing “scheduled quantities with physical deliveries.” Additionally, where the contract read that American could curtail Rainbow’s nominations when Transco requested or required Rainbow or American to “balance receipts and deliveries,” the trial court interpreted the contract to apply only to “an imbalance between Rainbow’s scheduled receipts and scheduled deliveries on Transco.”
The majority breezed right by this language, but Justice Farris certain did not. Nothing in the contract, for example, distinguished between “scheduled deliveries” and “physical deliverties,” and when the trial court wrote the distinction into the contract, it violated Texas law by rewriting the parties’ agreement. The upshot of this judicially inserted distinction was to revise the agreement “to refer only to an imbalance between receipts and scheduled deliverties and not to an imbalance between receipts and physical deliveries.” In short, the trial court “rewrote the contract to require [American] to perform such balancing service even on days when Transco issues such an OFO that applies to Rainbow.” It further changed the contract “to exempt [American] from performing balancing services for Rainbow on any day that Transco requested or required Rainbow to balance its scheduled receipts and scheduled deliveries, but not when Transco requested or required Rainbow to balance its receipts and physical deliveries.”
Justice Farris also took the trial court to task for considering extrinsic evidence to construe an otherwise unambiguous contract provision. It did this when it invoked the FERC tariff, Rainbow’s expert testimony on industry custom and usage, and the Operational Balancing Agreement between Transco and American. The OBA could, however, be used to “inform the meaning of the language the parties chose,” provided that “the trial court did not add to or alter an unrestricted term.” Signicantly, according to Justice Farris, the OBA made no distinction between scheduled and physical deliveries.
Justice Farris would reverse the judgment for Rainbow in its breach of contract claim and remand for a new trial. A new trial was necessary because the evidence raised a fact issue that required the trial court “to determine whether Transco had issued an OFO applicable to Rainbow on the dates upon which the court found [American] to be in breach for denying balancing services to Rainbow.” She further would reverse the trial court’s ruling that American repudiated the contract (since that ruling, too, depended on the trial court’s erroneous interpretation) and would reverse and render judgment for American on Rainbow’s damages claims. As to American’s counterclaim for breach of contract, Justice Farris would reverse and remand for new trial, along with American’s claim for attorney’s fees under Chapter 38. And because Rainbow’s breach of contract claim failed, so necessarily did its claims for fraud, fraudulent inducement, and negligent misrepresentation.
Justice Farris’s analysis clearly got SCOTX’s attention. The Court has set oral arguments for January 13.
