From: Subject: Texas Judiciary Online - HTML Opinion Date: Mon, 8 Jan 2007 00:05:37 -0600 MIME-Version: 1.0 Content-Type: multipart/related; type="text/html"; boundary="----=_NextPart_000_0007_01C732B8.B99F8900" X-MimeOLE: Produced By Microsoft MimeOLE V6.00.2900.3028 This is a multi-part message in MIME format. ------=_NextPart_000_0007_01C732B8.B99F8900 Content-Type: text/html; charset="Windows-1252" Content-Transfer-Encoding: quoted-printable Content-Location: http://www.14thcoa.courts.state.tx.us/opinions/HTMLOpinion.asp?OpinionID=82101 Texas Judiciary = Online - HTML Opinion
Send this document to a=20 colleague    Close=20 This Window


Motion for = Rehearing=20 Overruled; Affirmed; Opinion of May 26, 2005, Withdrawn and=20

Substitute Opinion filed April 28,=20 2006.

 

 

 

In=20 The

 

Fourteenth Court=20 of Appeals

_______________

 

NO. 14-03-01198-CV

_______________

 

XCO PRODUCTION = COMPANY,=20 Appellant

 

V.

 

BRUCE L. JAMISON = AND=20

B.L. JAMISON = FAMILY LIMITED=20 PARTNERSHIP, Appellees

           &n= bsp;           &nb= sp;           &nbs= p;            = ;            =             &= nbsp;           &n= bsp;           &nb= sp;           &nbs= p;            = ;            =           =20

On Appeal from = the 11th=20 District Court

Harris County,=20 Texas

Trial Court = Cause No.=20 99‑38725

           &n= bsp;           &nb= sp;           &nbs= p;            = ;            =             &= nbsp;           &n= bsp;           &nb= sp;           &nbs= p;            = ;            =           =20

 

S U B S T=20 I T U T E  O P I N I = O=20 N

We overrule the = Motion for=20 Rehearing filed by Appellant. =20 We withdraw the opinion issued on May 26, 2005, and we = issue the=20 following substitute opinion in its place.=20

Appellees, Bruce L. = Jamison and=20 B.L. Jamison Family Limited Partnership (collectively AJamison@), sued appellant XCO = Production Company (AXCO@) for breach of a = contract=20 governing Jamison=3Ds purchase of an = interest in=20 certain oil and gas properties. =20 The parties disagree over the interpretation of the = contract.  After a jury returned = its verdict=20 interpreting the contract in Jamison=3Ds favor, the trial = court=20 entered judgment for Jamison.

In three issues, XCO = contends=20 (1) the trial court erred by submitting a jury question regarding=20 interpretation of the contract because it is unambiguous and in=20 XCO=3Ds favor as a matter = of law, (2)=20 Jamison=3Ds claim is barred by = the=20 four-year statute of limitations, and (3) Jamison=3Ds claim is barred by = a two-year=20 contractual limitations period. =20 We agree  = that the=20 contract is unambiguous as a matter of law, but in = Jamison=3Ds favor.  Therefore, we conclude = any error=20 in submitting the jury question was harmless.  We further conclude  XCO failed to prove that = Jamison=3Ds breach of contract = claim is=20 barred by the four-year statute of limitations or a contractual=20 limitations period. =20 Accordingly, we affirm.

I.  = Background

XCO is an oil and gas = exploration company owned by Robert Gray.  The company owned = working=20 interests in oil and gas properties in Louisiana.  Southampton Mineral = Corporation=20 was the operator for these properties.  In 1991,  Jamison, who was = interested in a=20 low-risk investment opportunity that would provide tax advantages = and=20 future income, was introduced to Gray by one of = Jamison=3Ds friends.=20

Jamison and XCO = entered into a=20 written AMemorandum of=20 Agreement@ (APartnership=20 Agreement@) effective December = 13, 1991,=20 whereby Jamison purchased a portion of XCO=3Ds working interest in = several=20 Louisiana properties.  = The=20 Partnership Agreement created a tax partnership (APartnership@) between Jamison and = XCO.[1]  Under the Partnership = Agreement,=20 Jamison made a $500,000.00 capital contribution to the = partnership, and=20 XCO contributed its working interest in the properties.  The disputed portion of = the=20 Partnership Agreement, paragraph 9, concerns allocation of income = and=20 costs between XCO and Jamison:

9.        =20 Partnership Allocations. =20 Each item of income, gain, loss or deduction shall be = allocated=20 between XCO and JAMISON as follows:

 

(a)      =20 First, all [intangible drilling costs] and general and=20 administrative costs paid from December 13, 1991 through December = 31,=20 1992, shall be allocated to JAMISON, provided, however, that no = such=20 amounts shall be allocated to Jamison which would cause his fair = market=20 value capital account to become negative or increase its negative=20 position;

(b)      =20 Second, all depreciation with respect to tangibles held by = the Tax=20 Partnership or with respect to the Weldon Operating Agreement and=20 allocable to the XCO-JAMISON partnership shall be allocated to = JAMISON,=20 provided, however, that such allocations, in the aggregate, shall = not=20 cause his fair market value capital account to become negative or = increase=20 its negative position;

(c)       = All=20 costs other than those set forth in paragraphs 9.a and 9.b of this = Memorandum of Agreement shall be allocated to = XCO;

(d)       = 30%=20 of the XCO-JAMISON Partnership=3Ds net revenues, after adjustment for the = items of=20 cost set forth in paragraphs 9.a, b and c of this Memorandum of = Agreement,=20 shall be allocated to JAMISON until such time as he has received=20 $500,000.00 in distributions from the XCO-JAMISON Partnership=20 (APayout@); the balance of the net revenues shall = be=20 allocated to XCO during such period.

(e)       = After=20 Payout, Jamison shall receive 1.25% of the net profits of the = XCO-Jamison=20 Partnership; the balance of the XCO-JAMISON = Partnership=3Ds revenues, and all = of its=20 expenses, shall be allocated after Payout to=20 XCO.

The parties urge = different=20 interpretations of paragraph 9. =20 In summary, XCO claims paragraph 9 allowed XCO to deduct = all=20 costs, including lease operating expenses, intangible drilling = costs,=20 general and administrative costs, and depreciation, from net = revenues to=20 determine Jamison=3Ds Payout (30% of net=20 revenues).  In = contrast,=20 Jamison claims XCO could allocate to him only the costs listed in=20 subparagraphs (a) and (b) (intangible drilling costs, general and=20 administrative costs, and depreciation); and once $500,000.00 in = costs=20 were allocated to him, he was entitled to 30% of net revenues, = without=20 regard to costs, until he recouped his initial $500,000.00=20 investment.

Beginning in 1992, = Southampton=20 issued revenue and expense statements to the XCO-Jamison = Partnership.  The statements showed = the gross=20 income, taxes, royalties, and operating expenses of the various=20 properties, and the net profit or loss allocable to the aggregated = working=20 interests that partnered with Southampton in the properties.  The statements did not = directly=20 show the amounts to be billed or credited to the XCO-Jamison = Partnership,=20 but instead listed the amounts of ANet to = XCO@ and AJamison Net = Profit.@   ANet = revenues@ to Jamison, as = addressed by=20 paragraph 9(d) of the Partnership Agreement, were not addressed by = these=20 statements; however, the statements did reflect that Southampton = deducted=20 expenses from AJamison Net = Profit@ which were not = included in=20 paragraphs 9(a) or 9(b) of the Partnership Agreement.        =20

In mid-1992, an = unrelated=20 lawsuit involving the properties was filed against XCO in = Louisiana.  The  Louisiana court ordered = that all=20 XCO=3Ds revenues be paid = into the=20 registry of the Louisiana court. =20 The revenues were not released until early 1996.  At that time, XCO told = Jamison he=20 would receive no money because costs had greatly exceeded=20 revenues.

In 1999, Jamison sued = XCO for=20 breach of contract alleging that XCO failed to pay monies due and=20 improperly charged costs to him. =20 Jamison also alleged the Partnership Agreement was = ambiguous.  After hearing the = evidence, the=20 trial court determined that the Partnership Agreement was = ambiguous and=20 submitted a jury question regarding its meaning.  Specifically, the jury = was asked,=20 ADid [XCO] and = [Jamison] agree=20 that [Jamison] would be paid 30% of net revenues after = Jamison=3Ds $500,000[.00] = investment was=20 expended only on costs allocated to Jamison in Paragraph 9(a) and = 9(b) of=20 the parties=3D [Partnership]=20 Agreement?@  The jury answered = Ayes,@ thus interpreting = the=20 Partnership Agreement in Jamison=3Ds favor.  The trial court entered = judgment=20 awarding Jamison $417,173.00 in actual damages and $111,500.00 in=20 attorneys=3D fees, as well as = pre-judgment=20 and post-judgment interest. =20

 

II.  Interpretation of the = Partnership=20 Agreement

In its first issue, = XCO=20 contends the trial court erred in submitting the jury question = regarding=20 interpretation of the Partnership Agreement because the contract = is=20 unambiguous in XCO=3Ds favor as a matter = of law.[2]

A.       =20 Construction of Contracts

Our primary concern = in=20 interpreting a contract is ascertaining the = true intent=20 of the parties.  = Heritage=20 Res., Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996);=20 Hewlett-Packard Co. v. Benchmark Elecs., Inc., 142 S.W.3d = 554, 561=20 (Tex. App.CHouston [14th Dist.] = 2004, pet.=20 denied).  We examine = the=20 writing as a whole in an effort to harmonize and give effect to = all the=20 provisions of the contract so that none will be rendered = meaningless.  Coker v. Coker, = 650 S.W.2d=20 391, 393 (Tex. 1983); Hewlett-Packard, 142 S.W.3d at = 561.  We presume that the = parties to a=20 contract intend every clause to have some effect.  Heritage Res., = 939 S.W.2d=20 at 121.  We give = terms their=20 plain, ordinary, and generally accepted meaning unless the = contract shows=20 the parties used them in a technical or different sense.  Id.         =20 A contract is not ambiguous if it can be given a certain or = definite meaning as a matter of law. =20 Universal Health Servs., Inc. v. Renaissance=20 Women=3Ds Group, = P.A., 121 S.W.3d 742, 746 = (Tex.=20 2003); Columbia Gas Transmission Corp. v. New Ulm Gas, = Ltd., 940=20 S.W.2d 587, 589 (Tex. 1996). =20 Lack of clarity does not create an ambiguity.  Universal Health = Servs.,=20 121 S.W.3d at 746; Forbau v. Aetna Life Ins. Co., 876 = S.W.2d 132,=20 134 (Tex. 1994).  = Further, a=20 contract is not ambiguous simply because the parties advance = conflicting=20 interpretations.  = Columbia=20 Gas Transmission Corp., 940 S.W.2d at 589; Forbau, 876 = S.W.2d=20 at 134.  Rather, a = contract is=20 ambiguous if it is subject to two or more reasonable = interpretations after=20 applying the pertinent rules of construction.  Universal Health = Servs.,=20 121 S.W.3d at 746; Columbia Gas Transmission Corp., 940 = S.W.2d at=20 589.  If a contract = is=20 ambiguous, a fact issue exists on the parties=3D intent.  Columbia Gas = Transmission=20 Corp., 940 S.W.2d at 589.

In determining = whether a=20 contract is ambiguous, we look to the contract as a whole, in = light of the=20 circumstances present when the contract was executed. = Sun Oil=20 Co. (Del.) v. Madeley, = 626=20 S.W.2d 726, 731 (Tex. 1981); Mescalero Energy, Inc. v. = Underwriters=20 Indem. Gen. Agency, Inc., 56 S.W.3d 313, 319 (Tex. = App.CHouston=20 [1st Dist.] 2001, pet. denied); see also Hewlett-Packard, = 142=20 S.W.3d at 561 (AWe=20 construe a contract from a utilitarian standpoint, bearing in mind = the=20 particular business activity sought to be served.@).  These circumstances = include the=20 commonly understood meaning in the industry of a specialized term, = which=20 may be proven by extrinsic evidence such as expert testimony or = reference=20 material.  See=20 Mescalero, 56 S.W.3d at 320, 323; Zurich Am. Ins. Co. = v. Hunt=20 Petroleum (AEC), Inc. 157 S.W.3d 462, 465 = (Tex.=20 App.CHouston [14th Dist.] = 2004, no=20 pet.).

Accordingly, to = determine=20 whether the Partnership Agreement is ambiguous, we first examine = the words=20 of the Partnership Agreement, and considering the business = activity to be=20 served, determine the meaning of any specialized term as it is = interpreted=20 in the industry.  We = then must=20 decide whether both parties=3D interpretations are=20 reasonable.  If only = one=20 reasonable interpretation is offered, we will not find the = Partnership=20 Agreement ambiguous, but will enforce the Partnership Agreement = according=20 to its terms.  After = examining=20 the Partnership Agreement and the circumstances present when it = was made,=20 we conclude that XCO=3Ds construction is = not=20 reasonable, but Jamison=3Ds interpretation = is=20 reasonable.

 

 

B.       =20 XCO=3Ds=20 Interpretation

In support of its = argument that=20 only its interpretation is reasonable, XCO points to subparagraph = 9(d)=20 which provides, A30% of the = XCO-JAMISON=20 Partnership=3Ds net revenues, = after=20 adjustment for the items of cost set forth in paragraphs 9.a, b = and c=20 . . . shall be allocated to JAMISON . . . .@ (emphasis = added).  According to XCO, = Aafter = adjustment@ means Asubtract@; thus, all = costs,=20 including the costs set forth in subparagraphs (a), (b), and (c), = are to=20 be subtracted from net revenues before determining = Jamison=3Ds 30% Payout.[3]

XCO states that = because Jamison=20 purchased a Aworking = interest@ in the properties = and a=20 Aworking = interest@ is a cost-bearing = interest,=20 all costs had to be deducted from net revenues for = Jamison=3Ds interest to be a = Aworking = interest.@  The court-appointed = auditor who=20 examined the Agreement in connection with this suit opined in his = report=20 that all costs were to be deducted from net revenues to determine=20 Jamison=3Ds Payout.  This interpretation of=20 subparagraph (d), however, creates several conflicts with the rest = of=20 paragraph 9.  See = J.M.=20 Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex. 2003) = (stating=20 that in construing contracts, no single provision taken alone will = be=20 given controlling effect; rather, the court must consider the = entire=20 contract to harmonize and give effect to all its provisions, so = that none=20 will be rendered meaningless).

First, under = XCO=3Ds interpretation, = subparagraph=20 (d) conflicts with subparagraphs (a) and (b).  Subparagraphs (a) and = (b) state=20 that certain costs are to be allocated to Jamison=3Ds capital = account.  However, according to = XCO, under=20 subparagraph (d), these same costs are to be subtracted from net = revenues=20 to determine Jamison=3Ds Payout.  Therefore, = XCO=3Ds interpretation = creates a=20 conflict as to how the costs are to be=20 treated.

Further, under = XCO=3Ds interpretation, = subparagraph=20 (d) conflicts with subparagraph (c). =20 Subparagraph (c) provides that all costs other than=20 intangible drilling costs, general and administrative costs, and=20 depreciation are to be allocated to XCO.  But, subtracting these=20 Aother@ costs from net = revenues to=20 calculate Jamison=3Ds Payout, as urged by = XCO,=20 would effectively allocate a portion of these costs to Jamison in=20 contravention of subparagraph (c).

In addition, under=20 XCO=3Ds interpretation, = there is no=20 limit on the amount of costs that may be deducted from net = revenues to=20 determine Jamison=3Ds Payout.  That reasoning, however, = conflicts=20 with subparagraphs (a) and (b) which provide that Ano such amounts shall = be=20 allocated to Jamison that would cause his fair market value = capital=20 account to become negative or increase its negative = position.@  Allocating all costs, = regardless=20 of amount, to Jamison could cause his capital account = ($500,000.00) to=20 become negative.

Finally, = XCO=3Ds interpretation does = not=20 reconcile the use of the term Anet = revenues@ in subparagraph (d) = with the=20 use of the term Anet = profits@ in subparagraph = (e).  According to XCO, under=20 subparagraph (d), all costs are to be subtracted from Anet = revenues@ to determine=20 Jamison=3Ds Payout.  However, under = subparagraph (e),=20 after Jamison=3Ds Payout reaches = $500,000.00,=20 he then receives 1.25% of Anet = profits.@  If Anet = revenues@ include all costs as = urged by=20 XCO, then the use of the term Anet = profits@ in subparagraph (e) = is=20 rendered meaningless; it would be merely synonymous with = Anet = revenues.@  By using different = terms, the=20 parties recognized the difference between the two terms and = manifested=20 their intention to treat Anet = revenue@ separately from = Anet = profit.@  See Sun Oil = Co., 626=20 S.W.2d at 728 (where parties used different terms for oil and gas = in a=20 lease, it was apparent the parties understood the difference and = intended=20 to treat them separately).  = XCO=3Ds interpretation = fails to=20 explain how Jamison=3Ds interest converts = from a=20 Anet = revenues@ interest to a = Anet = profits@ interest if all = costs are=20 already being deducted from Anet = revenues.@

Because = XCO=3Ds interpretation = creates=20 several internal conflicts in paragraph 9, we conclude that=20 XCO=3Ds interpretation is = not=20 reasonable. =20

C.       =20 Jamison=3Ds=20 Interpretation

To substantiate his=20 interpretation of paragraph 9, Jamison relies on the testimony of = Shelly=20 Cashion, his tax lawyer who drafted the Partnership Agreement.[4]  Cashion testified the = Partnership=20 Agreement was an Aodd duck@ because it included = accounting=20 methodology unique to tax partnerships.  According to Cashion, in = oil and=20 gas taxation, Aallocate,@ Aadjust,@ Anet = revenues,@ and Anet = profits@ are terms of = art.  Cashion defined these = terms as=20 follows:

AAllocate@:  =20            &nbs= p; =20 means to divide tax items among partners. =

AAdjust@:           &nbs= p;        =20 is the consequence of that Aallocation.@ AAdjust@ does not mean Asubtract@ or Adeduct.@  = Rather, tax items are Aallocated@ to a partner, and the = partner=3Ds capital account is Aadjusted@ to account for that Aallocation.@

ANet revenues@:        =20 means the cash from oil and gas production minus severance = taxes=20 and royalties only. =20

ANet profits@: = means=20 Anet revenues@ minus Alease operating expenses,@ which are the operating costs of the=20 business.

 

Applying these = definitions to=20 paragraph 9, Cashion explained that pursuant to subparagraphs (a) = and (b),=20 intangible drilling costs, general and administrative expenses, = and=20 depreciation are allocated to Jamison=3Ds capital account = until his=20 capital account reaches zero. =20 In other words, Jamison receives a total allocation of no = more than=20 $500,000.00 in intangible drilling costs, general and = administrative=20 expenses, and depreciation. =20 Pursuant to subparagraph (c), all other costs are allocated = to=20 XCO=3Ds capital=20 account.

Next, Cashion = explained the=20 operation of the disputed subparagraph (d).  She testified that the = phrase=20 Aafter adjustment for = the items=20 of cost set forth in paragraphs 9(a), (b), and (c)@ does not require = that all the=20 costs outlined in subparagraphs (a), (b), and (c) be subtracted = from net=20