TXG Intrastate Pipeline Co v. Dean v. Grossnickle ( 1994 )

IN THE SUPREME COURT OF MISSISSIPPI
NO. 94-CA-00507-SCT
TXG INTRASTATE PIPELINE COMPANY
v.
DEAN V. GROSSNICKLE, LIQUIDATING
TRUSTEE FOR XENEREX PARTNERS, LTD.
AND
DEAN V. GROSSNICKLE, LIQUIDATING
TRUSTEE FOR XENEREX PARTNERS, LTD.
v.
SAN GABRIEL DEVELOPMENT CORPORATION,
ENRON OIL TRADING AND TRANSPORTATION
COMPANY AND TXG INTRASTATE PIPELINE
COMPANY
DATE OF JUDGMENT: 04/08/94
TRIAL JUDGE: HON. EDWARD G. CORTRIGHT, JR.
COURT FROM WHICH APPEALED: HOLMES COUNTY CHANCERY COURT
ATTORNEY FOR APPELLANT: JEFFERSON D. STEWART
ATTORNEYS FOR APPELLEES: BILLY JOE GILMORE
RONALD M. KIRK
GLENN GATES TAYLOR
NATURE OF THE CASE: CIVIL - CONTRACT
DISPOSITION: ON DIRECT APPEAL: REVERSED AND
RENDERED IN PART; REVERSED AND
REMANDED IN PART. ON CROSS-APPEAL:
AFFIRMED - 10/16/97
MOTION FOR REHEARING FILED: 11/7/97
MANDATE ISSUED: 6/25/98
BEFORE SULLIVAN, P.J., McRAE AND ROBERTS, JJ.
ROBERTS, JUSTICE, FOR THE COURT:
STATEMENT OF THE CASE
¶1. This case was first tried in January 1993 to determine whether Xenerex Partners, Ltd. owned a
37.5% working interest in a gas well known as the Smith Well and approximately 5,000 acres of oil
and gas leases, all located in Holmes County, Mississippi. In a March 24, 1993, "Judgment on
Plaintiff's Claims of Ownership", the chancellor ruled that Xenerex did own equitable title to an
undivided 37.5% working interest in those properties on the basis of resulting and constructive trusts
and was entitled to full title thereto. However, he reserved for further consideration: Plaintiff's claims
for an accounting and questions as to what extent the Limited Partnership's interest was subject to
any costs or claimed liens.
¶2. The original suit was filed on May 20, 1988, by Dean V. Grossnickle, Liquidating Trustee for
Xenerex. Named as defendants were the holder of record title to the Mississippi Property, San
Gabriel Development Corporation, the Transportation Company (EOTT), and Mississippi Valley Gas
Company, and other necessary parties who were asserting various liens and security interests on the
Mississippi Property.
¶3. On May 20, 1988, Grossnickle filed a lis pendens notice in the office of the Holmes County
Chancery Clerk. The second amended complaint was filed on September 10, 1990, adding as
defendants a later purchaser of production, TXG Intrastate Pipeline Company, and several other
necessary parties who were asserting royalty interests in leases taken in an area referred to as the
Thornton Field after this suit was filed.
¶4. By notice of trial setting filed October 14, 1993, the parties were given notice that the case was
set for trial on January 24, 25, and 26, 1994. TXG filed its motion to amend and supplement its
answer, and to assert a counter claim against Plaintiff on January 7, 1994. TXG also filed its Motion
for Joinder and Substitution of Proper Parties Plaintiff in This Cause. The court denied these motions
at the start of the trial on January 24, 1994. On April 12, 1994, the Final Judgment was entered, by
which the court: (1) rendered judgment in the amount of $125,614.85 against San Gabriel for the
Partnership's share of production through November 30, 1993, but without allowing any recovery for
gas produced from 1985 to 1988; (2) imposed a lien on the other 62.5% interest in the Mississippi
Property and on all future production proceeds attributable to that interest in order to satisfy the
portion of the judgment against San Gabriel for production occurring from 1985 to 1988, and (3)
ordered TXG and EOTT to account to and pay the Limited Partnership proceeds for production
attributable to its interest that TXG and EOTT had purchased since December 1990.
¶5. TXG's post-trial motion was denied by the court's order of May 2, 1994. TXG filed a notice of
appeal on May 26, 1994. The partnership cross-appealed against TXG, San Gabriel, and EOTT by
notice filed June 7, 1994.
¶6. TXG raises the following issues on appeal:
I. WHETHER REASONABLE COSTS ACTUALLY INCURRED BY TXG AND
MILMAC TO RESTORE AND OPERATE THE SMITH WELL AFTER DECEMBER
1990 ARE A NECESSARY PART OF ANY ACCOUNTING INCIDENT TO THE
PLAINTIFF'S 37.5% WORKING INTEREST IN THE SMITH WELL AND SHOULD
BE SHARED BY THAT INTEREST.
II. WHETHER, IN THE ACCOUNTING ON XENEREX PARTNER'S 37.5%
WORKING INTEREST, THE CHANCELLOR ERRED IN DENYING TXG'S
MOTION TO FILE AN AMENDED AND SUPPLEMENTAL ANSWER AND
EXCLUDING EVIDENCE PROFFERED BY TXG OF COSTS IT INCURRED TO
RESTORE THE SMITH WELL BACK TO PRODUCTION.
III. WHETHER PLAINTIFF'S EVIDENCE OF VALUE FOR OIL PRODUCED FROM
THE SMITH WELL BETWEEN 1985-1988 WAS COMPETENT OR SUFFICIENTLY
RELIABLE TO SUPPORT A JUDGMENT AGAINST SAN GABRIEL FOR $97,216.
IV. WHETHER THE CHANCELLOR ABUSED HIS DISCRETION OR EVEN HAD
AUTHORITY TO CREATE A JUDGMENT LIEN FOR THE DEBTS OF SAN
GABRIEL ON THE OTHER 62.5% WORKING INTEREST AND FUTURE
PRODUCTION PROCEEDS WHICH WERE OWNED BY ENTITIES NOT A PARTY
TO THIS SUIT.
V. WHETHER THE CHANCELLOR ABUSED HIS DISCRETION OR EVEN HAD
AUTHORITY TO MAKE THE JUDGMENT LIEN SUPERIOR TO THE
PREVIOUSLY PERFECTED SECURITY INTEREST OF MILMAC AND TXG.
VI. WHETHER THE CHANCELLOR ABUSED HIS DISCRETION OR EVEN HAD
AUTHORITY TO MAKE THE JUDGMENT LIEN SUPERIOR TO MILMAC'S
RIGHT TO RECOVER FUTURE OPERATING COSTS.
VII. WHETHER THE CHANCELLOR PROPERLY DENIED TXG'S MOTION TO
ALTER OR AMEND THE FINAL JUDGMENT TO PROVIDE THAT XENEREX
PARTNER'S 37.5% WORKING INTEREST IN THE SMITH WELL BE SUBJECT TO
ITS SHARE OF FUTURE OPERATING COSTS.
VIII. WHETHER THE CHANCELLOR PROPERLY DENIED TXG'S MOTION FOR
JOINDER AND SUBSTITUTION OF PROPER PARTIES PLAINTIFF, ESPECIALLY
EMPIRIC ENERGY, INC.
IX. WHETHER THE CHANCELLOR PROPERLY DENIED TXG'S REQUEST TO
AMEND THE FINAL JUDGMENT TO REFLECT THE OWNERSHIP AND
OBLIGATIONS OF EMPIRIC IN THE SMITH WELL AND LEASES.
X. WHETHER THE CHANCELLOR'S FAILURE AND/OR REFUSAL TO MAKE
FINDINGS OF FACT AND CONCLUSIONS OF LAW ON ISSUES IV.--IX., ABOVE,
IS REVERSIBLE ERROR.
¶7. Grossnickle cross-appealed to this Court on the following issue:
I. WHETHER THE LOWER COURT ABUSED ITS DISCRETION BY EXCLUDING
PLAINTIFF'S EVIDENCE OF THE VALUE OF THE NATURAL GAS PRODUCED
AND SOLD FROM THE GAS WELL AT ISSUE DURING THE PERIOD FROM 1985
UNTIL 1988, AND DENYING PLAINTIFF A JUDGMENT FOR THAT AMOUNT OF
MONEY.
STATEMENT OF FACTS
¶8. There is no appeal as to the judgment reached by the chancellor on March 1, 1993. It is the
alleged errors that occurred at the subsequent hearing on the accounting that have been brought
before this Court. However, in order for there to be a full understanding of this appeal, a recitation of
facts that led to the 1993 judgment is necessary. This case began in May of 1988 as a dispute
between some of the investors in Xenerex, who owned an undivided 37.5% working interest in the
Smith Well and some 5,000 acres of leases surrounding that well in Holmes County. Xenerex
Partners' claim was based on the fact they had paid $1.5 million in 1984 to San Gabriel's predecessor,
Matrix Energy, Inc., to purchase the 37.5% interest.
¶9. In August 1983, Xenerex Corporation was a Delaware corporation in the oil and gas business.
Matrix Energy, Inc., formerly known as Magna Matrix Energy, Inc., was a subsidiary of Xenerex.
James J. Ling was the Chairman of Xenerex, and James A. Myers was its President. Ling and Myers
also held those positions with Matrix. In November 1980, Matrix obtained title to approximately 5,
000 acres of oil and gas leases in the Thornton Field in Holmes County. On or about September 3,
1981, Xenerex, through its subsidiary Matrix, executed a promissory note for $1,200,000 to Bank de
l'Union Europeene (BUE), and purported to give BUE a security interest in property, which included
fixtures and other interests pertaining to the Smith Well and the oil and gas leases owned by Matrix in
the Thornton Field. A UCC financing statement was filed in the Holmes County records, but no deed
of trust was ever filed securing the note and apparently none ever existed.
¶10. In August of 1983, Ling distributed copies of a memorandum proposing a $5,000,000 private
placement on behalf of Xenerex. Such copies were reviewed by Grossnickle, Albert Susman, and
other individuals. Ling and Myers caused Xenerex to prepare a formal "Confidential Private
Placement Memorandum" dated September 26, 1983, which offered shares in a Texas limited
partnership to be known as "Xenerex Partners, Ltd.," with Xenerex Corporation as the general
partner. The proposal was agreed to by Xenerex Corporation, as the General Partner, and by five
limited partners, Grossnickle, Susman, A. D. Martin Properties, Inc., Hal R. Pettigrew, and Andrew
F. Stasio. The Limited Partnership was then formed and registered in accord with Texas law, and the
Limited Partners paid a total of $1,500,000 to Xenerex, for a combination of Xenerex stock and
Limited Partnership interests (totaling 99%) in the Limited Partnership.
¶11. Under the private Placement Memorandum, Xenerex agreed to have its subsidiary, Matrix,
transfer to the Limited Partnership various oil and gas properties and interests, including an undivided
37.5% share of the 100% working interest to which Matrix held record title in the Mississippi
Property. During 1984 and early 1985, Grossnickle inquired of Myers, the President of Xenerex and
Matrix, whether the various oil and gas interests, which were to be assigned to the Limited
Partnership, had in fact been assigned. Myers told Grossnickle that the assignments had been made,
and he would provide Grossnickle with copies of the assignments.
¶12. On September 16, 1985, Xenerex and Matrix filed a Chapter 11 bankruptcy petition in
Oklahoma. Although Myers represented to Grossnickle that the assignments of the Mississippi
Property had been made by Matrix to the Limited Partnership, no assignment had been made at the
time Xenerex and Matrix filed for bankruptcy. Therefore, legal title to the Mississippi Property
remained in Matrix when Matrix went into bankruptcy.
¶13. Soon after the bankruptcy petition was filed, Ling and Myers initiated their plan to have San
Gabriel, their new company, acquire the Mississippi Property. On October 10, 1985, Ling prepared a
memorandum detailing how a corporation, namely Hill Investors, Inc., could acquire the Mississippi
Property from Matrix. Ling had resigned from his positions as Chairman of Xenerex and Matrix after
the bankruptcy petition was filed, and was serving as the President of Hill Investors. By early 1986,
Ling had also become an officer and director of San Gabriel, and prepared a "business plan" to
acquire the Mississippi Property by April 1986. In April 1986, with Myers serving as its attorney and
consultant, San Gabriel entered into an agreement to acquire the BUE note.
¶14. On May 6, 1986, Xenerex and Matrix, by Myers, filed a motion in their bankruptcy case to
abandon the Mississippi Property from the bankruptcy estate. The stated purpose of the motion was
to obtain a release and satisfaction of the BUE note, which Xenerex and Matrix represented was
secured by the Mississippi Property. However, the Mississippi Property never secured the BUE note.
On September 11, 1986, the bankruptcy court entered its Order of Abandonment allowing Xenerex
and Matrix to abandon all of their interests in the Mississippi Property in exchange for San Gabriel's
release of the BUE note. Acting upon that Order, Matrix, through Myers, assigned the Mississippi
Property to San Gabriel on September 11, 1986.
¶15. Grossnickle and Susman first learned of the Motion and Order of Abandonment, and the Matrix
assignment to San Gabriel, on October 29, 1986, at the first meeting of creditors of Xenerex and
Matrix. Grossnickle and Susman filed a Motion to Vacate the Order of Abandonment and objections
to the Joint Disclosure Statement, which Matrix and Xenerex had filed in their bankruptcy case. The
motion stated, in relevant part, that Xenerex and Matrix had held the Mississippi Property in
constructive trust for the benefit of the partners of the Limited Partnership, and it would be a fraud
against the Limited Partners to permit Xenerex, the General Partner and owner of only a 1% interest
in the Partnership, to abandon the property for its and other's benefit.
¶16. In response, Xenerex and Matrix, by Myers, filed an amended disclosure statement on
November 17, 1986. They acknowledged that they "had requested, and believed, that assignments of
such oil and gas properties to Xenerex Partners had been prepared and recorded, although recent oral
inquires by the debtors to the County Recorders Office in Holmes County, Mississippi, revealed that
such assignments are not recorded." Xenerex and Matrix also acknowledged the Limited
Partnership's interest in the Mississippi Property, and indicated they did not intend to abandon that
interest out of the bankruptcy estate.
¶17. On February 19, 1987, the bankruptcy court denied the Motion to Vacate Order of
Abandonment, but amended that Order to provide that nothing therein "shall be construed as
affecting or impairing the rights, if any, of the Movant, Albert Susman and/or Dean V. Grossnickle,
or any other third party, in and to the properties abandoned by Debtors and described in said Order
of Abandonment." In April 1988, the bankruptcy court gave the Limited Partners the option of taking
a "formula" claim in bankruptcy, or pursuing recovery of the Limited Partnership's 37.5% interest in
the Mississippi Property. The Limited Partners elected the latter option and, through Grossnickle as
the Liquidating Trustee of the Limited Partnership, filed this suit in May of 1988.
¶18. On November 17, 1986, the same day that he acknowledged the Limited Partnership's interest in
the Mississippi Property in the Xenerex-Matrix bankruptcy case, Myers prepared and executed a
document which he claimed to be an assignment by the Limited Partnership to San Gabriel of the
Limited Partnership's interest in the Mississippi Property. Myers purported to execute the document
as President of Xenerex and in the capacity of general partner of the Limited Partnership. He claimed
that the instrument was executed pursuant to written consents obtained from three of the Limited
Partners, Martin, Pettigrew and Stasio. Myers testified that he obtained their consent by representing
to them that the Mississippi Property was dilapidated, hazardous, of insignificant value, and subject
to secured debt. The instrument in question does not contain any words of grant or assignment, was
never recorded, and was not disclosed to Grossnickle or Susman until August 1988.
¶19. The court below found that Xenerex did not have the authority to execute such an assignment of
the Limited Partnership's interest. When Xenerex took bankruptcy, the Limited Partnership was
automatically dissolved under the Articles of Limited Partnership. Upon dissolution, the Limited
Partnership could conduct no further business other than winding up and final distribution of assets to
the partners, and then only through the "Liquidating Trustee." Xenerex had no authority to act as
Liquidating Trustee because of its bankruptcy, and was not elected Liquidating Trustee. Even if
Xenerex had been elected Liquidating Trustee, the court further concluded, it could not, under the
articles, have assigned partnership property to any one other than the partners.
¶20. Ling and Myers, apparently in an attempt to extinguish the Limited Partnership's 37.5% interest,
began to take new leases that would "wash out" the leases subject to the interest. The oil, gas and
mineral leases, which covered the Smith Well when the Limited Partnership was formed, were
executed by the lessors in 1980 for a primary term of five years. Around March 1990, San Gabriel
began negotiating with TXG to sell the Tchula Lake gas plant (which processes gas from the Smith
Well), and associated pipeline to TXG. One of the conditions which Ling and Myers put on the
proposed sale was that TXG had to obtain new leases covering the Smith Well, and assign those
leases to San Gabriel. TXG acquired new leases and, as part of the closing on the sale for the gas
plant and pipeline by San Gabriel to TXG , assigned those leases to San Gabriel.
¶21. After it acquired the processing plant, TXG learned that the Smith Well was unable to produce
because of mechanical problems. TXG entered into discussions with San Gabriel about someone
taking over operations of the well and spending the money necessary to return it to production. TXG
did not have the expertise or inclination to become the well operator. Instead, it agreed to lend
money to an experienced operating company, namely Milmac, who had agreed to take over the
operation from San Gabriel and attempt to restore the Smith Well to production.
¶22. This arrangement was initially memorialized in two agreements, dated December 18, and
December 19, 1990. Under the December 18, 1990, agreement San Gabriel agreed that Milmac
would take over operations of the well and, at its own cost, attempt to restore the well to production.
In return, San Gabriel agreed to assign 100% of the working interest in the Smith Well and unit
leases to Milmac until such time as Milmac had recovered 200% of the amount of monies expended
by it to restore and operate the Smith Well out of the production proceeds. In the December 19,
1990, agreement TXG agreed to loan to Milmac the money needed to restore the well to production.
In return, Milmac agreed to assign to TXG all of the interest it received from San Gabriel until TXG
recovered 100% of the monies it advanced to the restoration project out of the production proceeds.
At that point and time, TXG and Milmac would share the remaining rights to the proceeds received
from San Gabriel on a basis of 75% to TXG, 25% to Milmac.
¶23. Milmac took over operations in December of 1990 and proceeded to restore the Smith Well to
production. Between December of 1990 and December of 1991, Milmac and TXG collectively spent
over $825,000 to restore the well to production. In April of 1991, Milmac began producing the
Smith Well again and selling the condensate (oil), while sending the gas to TXG's processing plant
where it was processed into sweet gas and other products for sale.
¶24. After the suit was filed, but prior to the chancellor's final judgment, the following assignments of
interest in the Smith Well and leases took place (as explained and summarized below):
1. By Assignment dated June 28, 1992, San Gabriel assigned operations and all of its working
interests in the Smith Well and leases to Milmac, until 200% of the restoration costs incurred
after December 1990 had been recovered out of production. Then the working interest would
automatically revert to twenty owners identified in Exhibit B to the Assignment;
2. By individual assignments executed in October and November 1992, all of the assignees of
the reversionary interest assigned their interest in the Smith Well and leases to Empiric Energy,
Inc.;
3. By three separate assignments, dated October 6, 1992, and January 18, 1993, A. D. Martin,
Jr., Hal R. Pettigrew and Andrew F. Stasio each assigned all of their interests in Xenerex
Partners, Ltd. and any property they were or may be entitled to receive in liquidation, including
but not limited to the Smith Well and leases and any recovery from this lawsuit to Empiric
Energy, Inc.;
4. By assignment dated January 22, 1993, Plaintiff assigned all right, title, and interest of
Xenerex Partners, Ltd. in the Smith Well and leases and any recovery from the lawsuit to the
following parties:
DJN, Inc. 1.00%
Dean V. Grossnickle 13.20%
Albert Susman 33.00%
Andrew F. Stasio 13.20%
A. D. Martin Properties, Inc. 13.20%
Hal R. Pettigrew 26.40%
¶25. The interest conveyed to A. D. Martin Properties, Inc., Hal R. Pettigrew and Andrew F. Stasio,
having previously been assigned to Empiric Energy, Inc., totaled 52.8% of Xenerex's 37.5% working
interest in the Smith Well and leases, as well as 52.8% of any recovery out of the lawsuit. Thus, after
January 22, 1993, Empiric Energy, Inc., was owner of 52.8% of the Xenerex 37.5% working
interest.
¶26. Xenerex's claim was based on the fact they had paid $1.5 million in 1984 to San Gabriel's
predecessor, Matrix, to purchase the 37.5% interest in the Mississippi Property. In three counts
Xenerex (1) claimed it owned equitable title to an undivided 37.5% working interest in the Smith
Well and surrounding leases and that San Gabriel was holding legal title in a resulting or constructive
trust for the benefit of Xenerex, (2) requested the court remove San Gabriel's claim of owning 100%
of the Smith Well and leases as a cloud on its title, and (3) requested San Gabriel be compelled to
convey title to the undivided 37.5% working interest to Xenerex or alternatively, to return the
purchase price of $1,500,000. At the same time, Xenerex filed a lis pendens notice in Book 2 of the
lis pendens records of Holmes County. TXG was not made a party to the litigation at this time.
¶27. On September 10, 1990, Xenerex filed its second amended complaint, adding TXG and others
as additional Defendants. The first three claims asked for the same relief asked for in the original
complaint. Xenerex added a fourth claim requesting that the court cancel certain "top leases"
acquired by San Gabriel in 1990 or that, in the alternative, it impose a constructive trust on those top
leases. In a new fifth claim, Xenerex requested that the court require all Defendants to render an
accounting and to pay the Plaintiff the proceeds from the sale of all gas, sulfur or other minerals
attributable to its 37.5% interest in the well. In a new sixth claim, Plaintiff sought an Attachment in
Chancery under Miss. Code Ann. § 11-31-1, et seq. on all monies attributable to San Gabriel's
interest in production from the Smith Well and leases. In a new count seven, the Plaintiff asked for a
preliminary injunction against San Gabriel and the purchasers of oil and gas from the Smith Well,
requiring them to pay all monies attributable to the production of those minerals into the Registry of
the Court. No additional or supplemental lis pendens was filed.
¶28. On January 19 and 20, 1993, trial on the merits was had before the chancellor. The agreements
between San Gabriel/Milmac and Milmac/TXG were introduced as exhibits, and TXG had San
Gabriel's president explain the agreements to the court. On March 2, 1993, the court issued its
opinion and directed counsel for the Plaintiff to draft a judgment. In the 1993 judgment, the
chancellor vested legal title of an undivided 37.5% of 100% working interest in and to the Smith
Well, its production unit, and the surrounding leases into Xenerex. The court then stated:
Plaintiff's claims for an accounting, and the questions as to what extent the Limited
Partnership's Interest is subject to any costs or claimed liens, have been reserved by the Court
for subsequent determination.
...
IT IS FURTHER ORDERED that Defendants shall provide Plaintiff with an accounting for all
production, proceeds from production, and claimed costs and liens relating to the Limited
Partnership's Interest, said accounting to be provided to Plaintiff's counsel within thirty (30)
days from the date of that judgment is entered. The parties are then granted sixty (60) days
from the date that the accounting is provided in which to confer, exchange information and
documents and conduct discovery on any questions relating to the accounting and whether and
to what extent the Limited Partnership's Interest may be subject to any claimed costs or liens.
The Court will then set a date to hear and resolve the remaining claims and issues.
¶29. Within two months of the 1993 judgment, TXG and Milmac had provided accounting
information on the restoration costs and the amount of gas sold to Plaintiff's attorney. On May 26,
1993, Plaintiff filed its "Fourth Set of Interrogatories and Third Request for Production of
Documents to all Defendants." On July 6, 1993, TXG filed its response as follows:
INTERROGATORY NO. 40: On a monthly and cumulative basis since January 1, 1984,
identify what you claim have been the costs and expenses of the Well, the identity of the
documents which support your claim of those costs and expenses, and the identity of all persons
who have knowledge of those costs and expenses.
RESPONSE TO INTERROGATORY NO. 40: TXG has never operated the Smith Well and
therefore, has no information concerning the costs and expenses of the Smith Well. Such
information is believed to be in the hands of San Gabriel. . .or Milmac Operating Company, the
prior and present operators of the Well.
¶30. No complaint as to the sufficiency of TXG's response was made.
¶31. Later, on September 22, 1993, Plaintiff filed a Motion to Compel Answers to Interrogatories
and Request for Production of Documents from San Gabriel. On September 23, 1993, it also filed its
Fifth Set of Interrogatories and Fourth Request for Production of Documents to all Defendants. San
Gabriel filed no response to the Motion to Compel. On October 14, 1993, the chancellor entered an
order compelling San Gabriel to respond to the Fourth Set of Interrogatories and Third Request for
Production of Documents as follows:
If San Gabriel fails to [respond to the Fourth Set of Interrogatories and produce the documents
requested in the Third Request for Production of Documents] within the said twenty-day
period, then at the trial which is to be held on the accounting phase and money judgment aspect
of this action, San Gabriel and its agents, servants, employees and attorneys shall be prohibited
from introducing any evidence of any claimed costs and liens relating to the "Limited
Partnership's Interest". . .
San Gabriel did not respond to the Fourth Set of Interrogatories and Third Request for Production of
Documents. However, on November 2, 1993, it did respond to Plaintiff's Fifth Set of Interrogatories
and Fourth Request for Production of Documents.
¶32. On September 28, 1993, Plaintiff filed a Motion to Require the Deposit of Production Proceeds
into the Registry of the Court. TXG opposed said Motion on the grounds that it had a right to first
recover the costs it incurred to restore the Smith Well out of that production. On October 20, 1993,
the court ordered TXG and Enron, purchasers of production from the Smith Well, to begin
depositing proceeds attributable to the Plaintiff's 37.5% working interest in the Smith Well into the
Registry of the Court.
¶33. The parties had been on notice since October 13, 1993, that trial was set to begin on January 24,
1994. On January 7, 1994, TXG filed a Motion to Amend and Supplement its Answers to the Second
Amended Complaint and also a Motion for Joinder and Substitution of Proper Party Plaintiffs.
According to Grossnickle, this was the first time that TXG asserted any claim to offset proceeds
attributable to the Limited Partnership's 37.5% interest against the monies TXG loaned to Milmac.
¶34. On January 18, 1994, TXG filed a notice to take the 30(b)(6) deposition of Empiric. Plaintiff
responded to that notice by filing a Motion for a Protective Order to prevent TXG from taking that
deposition. Between January 18th and 24th, both Plaintiff and TXG filed responses and rebuttals to
the three pending Motions. Included as Exhibit 1 to TXG's Rebuttal to the Motion for Joinder and
Substitution of Proper Party Plaintiffs was a Waiver of Service and Appearance by Empiric in which
Empiric admits that the 52.8% interest in Xenerex 37.5% working interest it acquired was subject to
the right of TXG and Milmac to recover the restoration and operating costs they have incurred since
December 1990. The deposition of Ling, President of Empiric, was taken on January 20, 1994.
¶35. On January 24, 1994, the parties appeared before the chancellor on the Motions and the
accounting phase of the case. At that time, the chancellor overruled TXG's two Motions. The
chancellor also sustained the Plaintiff's Motion for a Protective Order on the taking of the deposition
of Empiric. The chancellor then proceeded to hear testimony from the Plaintiff regarding revenues it
claimed was owed on the Xenerex 37.5% working interest in the Smith Well and leases. The
chancellor received testimony from TXG as to gas production and revenues since December 1990.
However, he sustained objections as to the introduction of any proof as to costs incurred by TXG to
restore the Smith Well after December of 1990. He further sustained an objection to introduction of
the deposition of Empiric.
¶36. On March 8, 1994, the court entered its opinion on the accounting phase of this case. Pursuant
to that opinion, counsel for the Plaintiff submitted a proposed Final Judgment. After an exchange of
letters regarding the form and content of the proposed Final Judgment, the chancellor, on April 12,
1994, entered his Final Judgment. On April 19, 1994, TXG filed its Motion to Alter or Amend the
Judgment or, Alternatively, for Additional Findings. On May 3, 1994, the court entered its Order
overruling that Motion. From these proceedings on the lower court level, TXG has perfected its
appeal and Grossnickle perfected its cross-appeal to this Court.
DISCUSSION OF ISSUES
I. WHETHER REASONABLE COSTS ACTUALLY INCURRED BY TXG AND
MILMAC TO RESTORE AND OPERATE THE SMITH WELL AFTER DECEMBER
1990 ARE A NECESSARY PART OF ANY ACCOUNTING INCIDENT TO THE
PLAINTIFF'S 37.5% WORKING INTEREST IN THE SMITH WELL AND SHOULD
BE SHARED BY THAT INTEREST.
¶37. In its 1993 judgment, the court held that Xenerex was the owner of an "undivided 37.5% of the
100% working interest in and to the said Smith Well,. . ., its production unit, and the oil, gas, and
mineral leases which cover the well and its production unit." A "working interest" ownership is the
ownership of oil, gas, and mineral leases. This interest creates in the owner the exclusive right and
implied obligation to explore for and develop those minerals by drilling. See Nations v. Sun Oil Co.,
695 F.2d 933, 938 (5th Cir. 1983).
¶38. In December 1980, the unit for the Smith Well was "integrated" by the Mississippi State Oil and
Gas Board pursuant to Miss. Code Ann. § 53-3-7. In that order, the Board expressly found that "the
operator is authorized to be reimbursed the proportionate cost of the drilling, completing, equipping
and operating, including a reasonable charge for supervision, of all drilling and production in said
pooled unit according to law." When the drilling unit for a well is "force-integrated" under Miss.
Code Ann. § 53-3-7, the well operator may recover from a non-consenting owner only those costs of
development or production that are (1) actually incurred, (2) necessary, and (3) reasonable. Pursue
Energy Corp. v. State Oil and Gas Bd., 524 So. 2d 569, 571 (Miss. 1988). In an accounting
between co-tenant working interest owners for production from a unit, the non-producing co-tenant
is entitled only to his share of the production proceeds after the reasonable, actual costs incurred by
the producing co-tenant in developing and operating the unit have been deducted. Mills v. Damson
Oil Corp., 931 F.2d 346, 349-50 (5th Cir. 1991).
¶39. Grossnickle, in testimony before the chancellor, admitted that the interest Xenerex received was
a working interest and that the partnership would be expected to make a contribution to any costs
incurred in any production from the well.
¶40. Under Mississippi law, an accounting of oil and gas interests must include consideration of
expenses. In Mills, the Fifth Circuit Court of Appeals upheld a district court ruling that an operator
account to the plaintiff for production "less development and production expenses." Id. at 349. In
reaching this decision the Fifth Circuit quoted from Martin v. Humble Oil and Refining Co., 199 F.
Supp. 648, 653 (S.D. Miss. 1960), aff'd and remanded on other grounds, 298 F.2d 163 (5th Cir.
1961), cert. denied, 371 U.S. 825 (1962), the following:
[T]here can be no question but what the Humble Oil and Refining Company had the right to go
into the land and explore, drill, produce and take the oil and gas therefrom. It, in effect, became
a co-tenant of the Plaintiff herein, but when one co-tenant develops oil and gas, he is under the
duty to account to the others who do not join with him from their pro rata share of the minerals
taken from the soil, after deducting the cost of production.
We find that the costs incurred by Milmac, which were fronted by the loan from TXG, should have
been included in the accounting conducted by the chancellor. The reasonable costs of production
should have been deducted pro rata from the 37.5% working interest before payment was made.
¶41. Grossnickle does not dispute the above interpretation of Mississippi law. He contends TXG
cannot deduct the pro rata costs of production attributable to the 37.5% working interests because
TXG is not and was not an operator of the Smith Well, nor was the money loaned to Milmac an
actual cost of operation.
¶42. Grossnickle claims that TXG has merely been a purchaser of the well's production. San Gabriel
was appointed the operator of the Smith Well in April 1987 by the State Oil and Gas Board, and was
still the operator at the time briefs for this appeal were filed. Beginning on March 1, 1991, Milmac,
and those hired by Milmac, have provided the actual operating services for the well pursuant to an
agreement with San Gabriel. TXG, by separate agreement discussed above, loaned money to Milmac
in order for Milmac to restore the well to production. Grossnickle claims that TXG is not and never
has been the actual operator of the well. Therefore, his interpretation of Miss. Code Ann. § 53-3-7
does not give TXG any right to deduct costs incurred by San Gabriel or Milmac from the proceeds
that TXG owes to the Limited Partnership for its 37.5% working interest.
¶43. TXG responds that Miss. Code Ann. § 53-3-7 specifically allows the Limited Partnership's
working interest to be properly charged with the appropriate costs of developing and restoring the
Smith Well. This Court agrees, notwithstanding the fact that TXG is not the actual operator of the
Smith Well. In Miss. Code Ann. § 53-3-7 (2)(g) and (h), the terms "operator and/or appropriate
consenting owners" are used to delineate the specific parties to be reimbursed for expenses where it
indicates the parties who share in the payment of the costs also share in the recovery out of
production. The term "owner" is defined at Miss. Code Ann. § 53-1-3 (g) as "the person who has the
right to drill into and produce from any pool, and to appropriate the production either for himself or
for himself and another or others. . ." The Court interprets the language contained in the statute as
not requiring a party to be an actual operator of a well before recovery of incurred costs can be had.
The language only requires the party to have a right to appropriate the production to himself or
others. Because of the assignment with Milmac, TXG had a right to receive the production from the
well to be reimbursed for the money it loaned Milmac. Grossnickle's argument that the Limited
Partnership should not have to deduct expenses from its pro rata share of the proceeds from the well
because TXG is not an actual owner is without merit.
¶44. Next Grossnickle claims that the loan by TXG to Milmac was not an actual cost of operation.
Grossnickle states that TXG has not incurred any actual costs of operation which can be deducted
from production proceeds under Miss. Code Ann. § 53-3-7. The only support Grossnickle provides
the Court as to this theory is found in a footnote in his brief.(1) It is unclear how this supports
Grossnickle's argument. He further states that TXG does not claim that it has provided operating
services for the well. Because no authority was cited to this Court on that point this argument is not
to be considered. See Gerrard v. State, 619 So. 2d 212, 216 (Miss. 1993) (claims with no citation in
support are not to be considered as they are not properly before the Court).
¶45. TXG responds to Grossnickle's claim that the loan was not an actual cost of operation by stating
the loans were made solely for actual, reasonable costs used to restore the Smith Well to productive
status. TXG claims this was evidenced in the December 19, 1990, agreement wherein TXG agreed to
"pay. . .to Milmac an amount equal to the Actual Cost of performing the Work ('Prepay') by paying
to Milmac amounts that are invoiced by Milmac in accordance with Sections 1 & 2 with its
agreement with [San Gabriel]." Under the Milmac/San Gabriel agreement, Milmac was required to
render "an itemized statement containing a detailed description of each major item of the Work
actually performed and the Actual Cost incurred by [Milmac] with respect thereto, ('Actual Cost')."
At trial, TXG tried to introduce, then proffered evidence, that the invoices and supporting documents
from Milmac constituted reasonable and necessary expenses solely related to the workover
operations on the Smith Well.
¶46. TXG responds to Grossnickle's contention that TXG's evidence was inadmissible because no
one ever produced supporting documentation, such as invoices and payment records, by stating the
contention is simply not true. TXG directs this Court's attention to two points. First, TXG provided
Grossnickle with supporting documentation in its response to Grossnickle's interrogatory No. 45.
Secondly, TXG claims that Grossnickle waived any objection to the payment records when he
stipulated to the accuracy of TXG's proffered evidence on well costs.
¶47. Lastly, TXG presents this Court with the argument that under the 1993 judgment by the
chancellor San Gabriel was determined to hold legal title to the 37.5% working interest only as a
constructive trustee. Because TXG had received its rights in the well by way of the assignment from
Milmac, who had received its rights in the well by assignment from San Gabriel (the original
constructive trustee), TXG claims to also stand in the position of constructive trustee instead of San
Gabriel. This would mean where any money is spent by the constructive trustee to preserve or
improve the trust property held in trust, those costs should be borne by the beneficiary's income.
Russell v. Douglas, 243 Miss. 497, 506, 138 So. 2d 730, 734 (1962).
¶48. Grossnickle counters that TXG was not held to be and does not now claim that it was the
Limited Partnership's constructive trustee, and thus has no claim as a constructive trustee to recover
the monies it loaned to Milmac from the Limited Partnership or the 37.5% interest. Grossnickle states
that if TXG is attempting to claim constructive trustee status as a subrogee of San Gabriel, the
subrogee has no greater rights than the subrogor. Meridian Prod. Credit Ass'n. v. Edwards, 231 So.
2d 806, 808 (Miss. 1970). Grossnickle then argues that TXG lost any such claim by San Gabriel's
failure to pursue it at trial. However, we find Grossnickle's argument without merit. TXG attempted
to put on evidence of the costs associated with the production of the Smith Well, but was denied the
opportunity. Therefore, because TXG was a named defendant and denied the opportunity to present
evidence as to the costs associated with the Smith Well, Grossnickle's argument is without merit and
not properly before the Court.
¶49. TXG claims the exclusion of such evidence made it impossible to correctly account for that
working interest. Further, TXG contends that when the chancellor awarded the Limited Partnership
37.5% of the past revenues, without the concurrent costs to obtain those revenues, the chancellor
transformed the working interest into a royalty interest (non-cost bearing). We agree with TXG. The
37.5% interest had already been determined to be a working interest (cost bearing). Equity would
require the 37.5% working interest bear its pro rata share of the costs associated with production.
The chancellor erred by not allowing the evidence of costs to be considered in the accounting of the
proceeds of production from the Smith Well. This case is reversed and remanded for a new trial with
instructions for the chancellor to consider costs of production consistent with the decision of this
Court.
II. WHETHER, IN THE ACCOUNTING ON XENEREX PARTNER'S 37.5%
WORKING INTEREST, THE CHANCELLOR ERRED IN DENYING TXG'S
MOTION TO FILE AN AMENDED AND SUPPLEMENTAL ANSWER AND
EXCLUDING EVIDENCE PROFFERED BY TXG OF COSTS IT INCURRED TO
RESTORE THE SMITH WELL BACK TO PRODUCTION.
¶50. In his opinion on March 8, 1994, the chancellor denied TXG's Motion to Amend its Answer and
Counterclaim on two grounds: "untimeliness and the fact that TXG had no greater rights than its
remote grantor, San Gabriel, which had been foreclosed from putting on proof of costs and expenses
for failure to comply with discovery requests."
¶51. As to the timeliness issue, the court summarized:
Otherwise put, TXG went from December 19, 1990, until January of 1994 without asserting
any claim for monies advanced Milmac based either upon the aforesaid assignment of the other
legal theories advanced in its proposed counterclaim. Furthermore, TXG cannot claim that the
terms of the judgment of March 24, 1993, was sufficiently broad to admit proof of a claim
existing since December of 1990 to be belatedly asserted. The language of that judgment
providing that after accountings [sic] were made by the applicable defendant the Court would
set a date to hear "the remaining claims and issues" obviously had reference to claims and issues
which had been asserted at the time the judgment was rendered. The language clearly was not
intended as an open invitation for parties to wait a year and then on the eve of the second
hearing assert claims not previously advanced.
TXG asserts that in holding the motion to amend to be untimely, the chancellor ignored evidence in
the record and in the previous trial that made clear TXG's claims had been "previously advanced."
TXG states that the Plaintiff and the chancellor were placed on notice of TXG's claim to recover
restoration costs from 100% of the production from the Smith Well at the first trial in January 1993.
TXG argues that counsel for the Plaintiff, along with counsel for TXG, met in chambers with the
chancellor during the first trial and openly discussed TXG's claims to 100% of the revenues from the
Smith Well based on the contractual right set forth in the letter agreements that had been admitted
into evidence that day.
¶52. TXG asserts that the Plaintiff was further placed on notice as to TXG's claims when counsel for
the Plaintiff, counsel for TXG, and representatives from TXG and Milmac met in Jackson to discuss
the reworking costs and operating costs, along with the oil revenues associated with the Smith Well.
At that time, an accounting of the restoration costs prepared by Milmac was given to the Plaintiff and
TXG's claim to recovery of costs out of 100% of the revenues was again discussed. On May 6, 1993,
TXG's director of marketing sent a letter to Plaintiff's counsel again discussing the workover costs
incurred by Milmac and Plaintiff's obligation to bear its 37.5% share.
¶53. Attached as Exhibit 2 to Plaintiff's September 22, 1993, Motion to Compel Discovery from San
Gabriel were a number of documents previously made available to the Plaintiff.(2) Plaintiff's counsel
and the chancellor were again advised of TXG's claim and position in TXG's October 12, 1993,
Response to Plaintiff's Motion for Deposit into Court.(3)
¶54. On October 12, 1993, counsel for TXG also sent a letter to Plaintiff's attorney and the
chancellor reiterating its present position in the litigation.(4) On October 13, 1993, counsel for the
Plaintiff also sent a letter to the chancellor.(5)
¶55. TXG asserts to this Court that because of the above correspondence and documentation
between the Plaintiff, Defendant, and the chancellor, adequate notice was given as to its claims for
costs of production associated with reworking the Smith Well. TXG explains the informality
associated with the exchange of information was a result of the chancellor's March 24, 1993,
judgment.(6) TXG interpreted the language "remaining claims and issues" to be those that remain
after the informal accounting to Plaintiff, the exchange of information, and discovery by all
Defendants. Further, TXG asserts the letter from the Plaintiff to the chancellor on October 13, 1993,
made it clear that the Plaintiff thought the claims of TXG were at issue.
¶56. TXG argues before this Court that it complied with the lower court's requirement of an
accounting and with the discovery requests made upon it by the Plaintiff. Milmac, who was not even
a party to the litigation, provided a detailed accounting of the restoration costs incurred after
December 1990 on the Smith Well. On January 7, 1994, TXG filed its Motion to Amend its Answer
in order to restate its "remaining claims and issues" before the court. TXG claims that this was in
compliance with Miss. R. Civ. P. 15, which provides that a party's request to amend or supplement its
pleading should be "freely given when justice so requires."
¶57. Grossnickle responds by asserting motions for leave to amend pleadings are addressed to the
sound discretion of the trial judge. Simmons v. Thompson Mach. of Miss., Inc., 631 So. 2d 798,
800 (Miss. 1994). This Court has affirmed the denial of motions to amend for undue delay or the
failure to exercise due diligence. See, e.g., Natural Mother v. Paternal Aunt, 583 So. 2d 614, 616-
17 (Miss. 1991). The trial court denied TXG's motion for untimeliness and prejudice to Plaintiff, and
the discovery sanctions order against San Gabriel, and TXG's failure to establish that its prior
omission of the defenses and claim was due to inadvertence, oversight or excusable neglect.
¶58. Grossnickle claims that to allow TXG's amendment would have been prejudicial to his case. An
untimely motion to amend may be prejudicial where allowance of the amendment would burden the
adverse party with more discovery, preparation, and expense, particularly where the adverse party
would have little time to investigate and acquaint itself with the new matter. Natural Mother, 583
So. 2d at 617. The motion to amend was filed on January 7, 1994, before trial was set to and did
begin on January 24, 1994.
¶59. In practice an amendment should be denied only if the amendment would cause actual prejudice
to the opposite party. Miss. R. Civ. P. 15, cmt.; 6 Charles A. Wright & Arthur R. Miller, Federal
Practice & Procedure, § 1484 (2d ed. 1990). The chancellor found that allowing the amendment
would be prejudicial "for the multiple reasons set forth in Plaintiff's brief," which the court allowed to
be placed into the record as Exhibit 101.(7) Grossnickle claims that it was not an abuse of discretion
to deny TXG's proposed amendment, contending that it would have raised numerous new legal and
factual issues less than three weeks before trial.
¶60. TXG rebuts this with the assertion that San Gabriel raised the issue of Xenerex's working
interest bearing its pro rata share of costs since November 30, 1990, as its Twelfth affirmative
defense in Response to Plaintiff's Second Amended Petition. Accordingly, and contrary to the
chancellor's holding, these issues and claims did in fact exist as of the date of the 1993 Judgment and
there was no basis to disallow TXG's amendment on grounds that such claims were untimely made.
TXG's amendment would have merely formally pled those issues previously raised at the January
1993 trial.
¶61. Grossnickle's counsel was provided with the relevant evidence nine months prior to the
accounting, and he had full knowledge of TXG's claims. TXG's motion to amend was neither
untimely nor prejudicial where it merely restated previously raised issues and legal bases for TXG's
position in this case that Grossnickle's working interest must be charged with its pro rata share of
costs during the accounting. In Guthrie v. J.C. Penney Co., Inc., 803 F.2d 202, 210 (5th Cir. 1986),
the defendant was allowed to amend his pleadings where the plaintiff did not show he had suffered
any prejudice because of the delay. Because the defense raised no new factual issues and the eleven
days remaining prior to trial should have been enough to research the legal issues involved, the judge
allowed the amendment to the defense pleadings. Id. Likewise, this Court finds that three weeks prior
to trial in the case sub judice should have been sufficient for Grossnickle to research the legal issues
involved to claims previously asserted, although possibly not specifically enumerated in a formal
defense pleading. There is no question that Grossnickle had knowledge of TXG's claim for the 37.5%
working interest to share pro rata in the costs of production associated with the Smith Well. We hold
that the amendment should have been allowed, and it was an abuse of discretion requiring reversal for
the chancellor to deny such an amendment.
¶62. On May 24, 1993, Plaintiff filed its Fourth Set of Interrogatories and Third Set of Requests for
Production of Documents to all Defendants. On July 6, 1993, TXG responded by telling Plaintiff it
had already given Plaintiff all of the documents and information it had on the accounting and that
James McAuley of Milmac and James Ling of San Gabriel would have the rest. TXG's responses
were never formally questioned. On September 22, 1993, Plaintiff filed a Motion to Compel San
Gabriel to answer that discovery. In that motion, Plaintiff revealed that it had in fact received an
accounting from "other parties" and, as part of Exhibit 2 to its motion, attached a detailed list and
spreadsheet submitted by San Gabriel in response to discovery which showed $825,067.88 in
expenses incurred to restore the Smith Well to operation between December 1990 and December
1991.
¶63. Without any response to the motion by San Gabriel, the chancellor entered his October 14,
1993, Order imposing sanctions if San Gabriel failed to respond to the discovery within 20 days. San
Gabriel did not respond to the Fourth Set of Interrogatories and Fifth Request for Production of
Documents. However, on November 2, 1993, it did respond to Plaintiff's Fifth Set of Interrogatories
and Fourth Set of Request for Production of Documents, filed by Plaintiff at the same time it filed its
Motion to Compel.
¶64. A comparison of the Fourth and Fifth Set of Interrogatories reveals that the information
provided by San Gabriel in response to the Fifth Set included virtually all information requested in the
Fourth Set. San Gabriel's response to the Fifth Set of Interrogatories identified Milmac, through its
president, James McAuley, as the proper party to give a detailed list of well costs after December
1990. San Gabriel identified James Myers and James Ling as the only potential witnesses on its behalf
and indicated that James McAuley had knowledge of facts and documents relating to well costs. The
data regarding workover costs after December 1990 which had been previously supplied to the
Plaintiffs was again attached as an exhibit.
¶65. The chancellor used the October 1993 sanctions order against San Gabriel to prohibit TXG, a
party in this case since 1990, from introducing any proof of costs it incurred after December 1990.
TXG had itself responded to the discovery requests, and Plaintiff had been provided the nature and
the amount of restoration costs claimed by TXG in both the informal accounting and responses to
discovery. At trial Plaintiff had stipulated as to the accuracy of the well cost figures after 1990, but
would not stipulate as to the reasonableness of those costs, nor their admissibility or application to
Xenerex Partners' 37.5% working interest.
¶66. Miss. R. Civ. P. 37 (b)(2)(B) authorizes the court to exclude "undisclosed evidence" of a party
who fails to comply with a discovery order. Ladner v. Ladner, 436 So. 2d 1366, 1370 (Miss. 1983).
"Exclusion of evidence is a last resort. Every reasonable alternative means of assuring the elimination
of any prejudice to the moving party and a proper sanction against the offending party should be
explored before ordering exclusion." McCollum v. Franklin, 608 So. 2d 692, 694 (Miss. 1992). "In
the imposition of sanction[s], the trial court has considerable discretion in matters pertaining to
discovery and its orders will not be disturbed in the absence of abuse of discretion." Kilpatrick v.
Mississippi Baptist Medical Ctr., 461 So. 2d 765, 767 (Miss. 1984).
¶67. This Court has "ruled that sanctions may be imposed for the failure to supplement even without
a prior court order compelling discovery." Denman v. Hardy, 437 So. 2d 426, 429 (Miss. 1983).
"Sanctions would be permitted in such a case because the discovering party would ordinarily have no
way of knowing that a response should have been supplemented until he finds out at trial." Id. "Also,
under the inherent power of courts to protect the integrity of their process, courts may impose
sanctions without a court order." Kilpatrick, 461 So. 2d at 767.
¶68. Although no order compelling discovery in lieu of sanctions was entered naming TXG, the
chancellor used the order naming San Gabriel to impose sanctions on TXG after San Gabriel failed to
comply with the chancellor's order. "[A] failure to comply with '. . .an order to provide or permit
discovery, including an order [compelling discovery]' is required." January v. Barnes, 621 So. 2d
915, 922 (Miss. 1992). The order did not mention TXG, only San Gabriel. The Plaintiff never sought
and the court never issued an order which directed TXG to comply with discovery.
¶69. Faced with a similar situation, the Second Circuit Court of Appeals held that a sanctions order
directed at one party defendant is not sufficient to warn other parties of potential exposure to
discovery sanctions. Daval Steel Prod. v. M/V Fakredine, 951 F.2d 1357, 1365 (2d Cir. 1991). In
that case there were two corporations owned in part by the same family. One was incorporated in
New York, and the other incorporated in Turkey. Id. at 1359. At a hearing the court issued an oral
order requiring the New York defendant to comply with discovery. Id. at 1361. The New York
defendant failed to comply with this order, and later the court sustained the plaintiff's motion for
sanctions under Fed. R. Civ. P. 37 (b)(2)(B) against both corporate defendants. Id. The Second
Circuit reversed, stating the court order was directed to the defendant, who had received discovery
notices, and not to the second defendant, who was not mentioned in the prior order by the court. Id.
at 1364.
¶70. Likewise, in the present case, TXG had received no notice for compelled discovery, nor was it
mentioned in the chancellor's order imposing sanctions on San Gabriel. Therefore, we hold that the
chancellor committed an abuse of discretion by imposing the same sanctions on TXG as it did on San
Gabriel where TXG was not a named party in the chancellor's order.
¶71. Grossnickle responds by stating there was no abuse of discretion on the part of the chancellor
where he excluded TXG's offer of proof of well costs of production. Grossnickle's argument is two-
fold. First, Grossnickle states the chancellor excluded the evidence based on the protective order and
motion in limine previously granted by the chancellor. These were granted based on the denial of
TXG's motion to amend, the discovery sanctions order, and TXG's supposed untimely assertion of its
defenses and claims. However, this Court, as previously discussed above, has determined that the
assertion of defenses by TXG was timely and should have been allowed by amended defense
pleadings.
¶72. Secondly, Grossnickle asserts the evidence was excluded based on the sanctions order imposed
on San Gabriel. Grossnickle argues that San Gabriel's failure to comply prevented San Gabriel and all
persons claiming through it from introducing any evidence of any claimed costs and liens relating to
the Limited Partnership's 37.5% interest in the Mississippi Property. The sanctions order, as
interpreted by Grossnickle, was binding on San Gabriel and its successors-in-interest, regardless of
whether those successors were parties or were disclosed. Grossnickle's supporting authority is Rule
25(c) of the Miss. R. Civ. P., which provides:
(c) Transfer of Interest. In case of any transfer of interest, the action may be continued by or
against the original party, unless the court upon motion directs the person to whom the interest
is transferred to be substituted in the action or joined with the original party. . . .
The official Comment explains:
The most significant feature of Rule 25(c) is that it does not require that any action be taken
after an interest has been transferred; the action may be continued by or against the original
party and the judgment will be binding on his successor in interest even though he is not named.
An order of joinder in such a situation is merely a discretionary determination by the trial court
that the transferee's presence would facilitate the conduct of the litigation. . . .
¶73. Labeling TXG as a successor-in-interest to San Gabriel, Grossnickle claims that TXG only
attempted to supplement its discovery and amend its pleading to assert any such claim against
Plaintiff after the sanctions were imposed on San Gabriel. Further, he asserts that TXG's motion to
amend was properly denied as it was an attempt to circumvent the sanctions order by reviving San
Gabriel's position.
¶74. Assuming arguendo the successor-in-interest assertion has merit, the order does not name
successors-in-interest as parties that will be bound by the chancellor's decision. The order was limited
to "San Gabriel and its agents, servants, employees and attorneys." Additionally, TXG's rights in the
Smith Well were acquired long before the October 1993 sanctions order. TXG did not acquire its
rights from San Gabriel already subject to the sanctions order.
¶75. Rule 25 of the Miss. R. Civ. P. by its terms applies to judgments, not pre-trial discovery orders.
Rule 37 of the Miss. R. Civ. P. governs sanctions as to discovery, not Rule 25. Therefore, it was
error for the chancellor to impose the same sanctions on TXG as it did on San Gabriel when TXG
had complied with all discovery requests. San Gabriel failed to comply with the court's motion to
compel discovery. However, TXG had no notice of this motion nor the subsequent motion to
compel. To hold TXG accountable to the order naming only San Gabriel when TXG was a separate
named defendant in this case would, in this Court's opinion, be inequitable and severe.
III. WHETHER PLAINTIFF'S EVIDENCE OF VALUE FOR OIL PRODUCED FROM
THE SMITH WELL BETWEEN 1985-1988 WAS COMPETENT OR SUFFICIENTLY
RELIABLE TO SUPPORT A JUDGEMENT AGAINST SAN GABRIEL FOR $97,216.
¶76. At trial, Plaintiff's counsel attempted, through the testimony of Grossnickle, to introduce Exhibit
104: a chart setting forth oil and gas "revenues" purportedly generated by the Smith Well from May
1985 through May 1988. Grossnickle testified that he obtained the production figure from reports
filed with the Oil and Gas Board. The oil and gas prices were estimated "as to what Grossnickle
deemed a fair price." The $16.00 per barrel price from 1985-1988 was based on his recollection of
reading the Dallas Morning News business section. Grossnickle's testimony pertaining to the price of
gas from 1985-1988 was based upon what he believed to be the price under the present gas contract
between TXG and San Gabriel (dated May 23, 1990). Grossnickle's testimony was the only evidence
offered by the Plaintiff to support the values claimed for the oil and gas produced in 1985-88.
¶77. The chancellor stated in his March 8, 1994 Opinion:
I am of the opinion [Exhibit 104] is entitled to be introduced, but considered in part only. More
specifically, the volume of gas and oil produced for the periods shown are admissible. Likewise
admissible is the testimony of Mr. Grossnickle, also reflected on the exhibit, that $16.00 per
barrel was the average reasonable value for oil produced during the 1985-1988 period.
Certainly there was an inexactitude about his valuation, but his opinion was based upon
reasonable deductions and conclusions. Mr. Grossnickle was no stranger to the Smith Well in
that he was actually the owner of an interest therein. He had a long-standing professional
interest in the oil business and in a general way had followed the prices of oil during the 1985-
1988 period. Furthermore TXG, having been determined to have no interest in this particular
issue, was without standing to object. Based upon Mr. Grossnickle's testimony I find that the
Plaintiff's share (37.5%) of the oil produced in the 1985-1988 period is valued at $97,216.
However, I cannot accept Mr. Grossnickle's valuation of gas produced during this period as it
has no reasonable basis. Mr. Grossnickle estimated the average value of the gas to be 41 ½
cents per MCF, but he admitted to having no knowledge of the value of gas or what price San
Gabriel received during the period. He rested his estimate solely on the price of gas as agreed
upon in gas contracts executed between TXG and San Gabriel after 1988. This evidence is too
speculative to support a judgment.
¶78. TXG argues that while Grossnickle is an accountant, he was not qualified to testify as an expert
witness in the area of oil and as to market prices. Therefore, TXG correctly asserts Grossnickle's
testimony should be based on personal knowledge in order to be admissible under Miss. R. Evid. 602.
TXG also argues that Grossnickle was not an owner of an interest in the Smith Well until he received
an assignment from Xenerex Partners in January of 1993. TXG states that because Grossnickle did
not buy and sell any oil, especially oil from the Smith Well, he had no personal knowledge of oil
prices from the Smith Well from 1985-1988 and had not contacted the purchasers for an accurate
determination.
¶79. TXG contends the only evidence presented to support Grossnickle's estimate as to the value of
oil produced from the Smith Well was his recollection of the reported price of oil produced in West
Texas. TXG hinges its argument on Grossnickle's testimony regarding the Smith Well producing
hydrogen sulfide and that oil with hydrogen sulfide (sour oil) sells for less than West Texas "sweet"
oil. TXG claims that evidence of sales of "sweet" oil from West Texas, without more, is not
competent proof of the value of sour oil which must be processed in Holmes County to be produced
and marketed.
¶80. Grossnickle responds by stating that under Mississippi law, "[w]here it is reasonably certain that
damage has resulted, mere uncertainty as to the amount will not preclude the right of recovery or
prevent a jury decision awarding damages." Nichols v. Stacks, 485 So. 2d 1034, 1038 (Miss. 1986)
(quoting Cain v. Mid-South Pump Co., 458 So. 2d 1048, 1050 (Miss. 1984)).
Under such circumstances, all that can be required is that the evidence--with such certainty as
the nature of the particular case may permit--lay a foundation which will enable the trier of facts
to make a fair and reasonable estimate of the amount of damage. The plaintiff will not be
denied a substantial recovery if he has produced the best evidence available and it is sufficient to
afford a reasonable basis for estimating his loss.
Nichols, 485 So. 2d at 1038 (emphasis in the original) (quoting Cain, 458 So. 2d at 1050.)
¶81. "Liability cannot be escaped on the grounds that the proof as to the amount of damages, if any,
is too uncertain to justify the lower court's award." Aqua-Culture Technologies, Ltd. v. Holly, 677
So. 2d 171, 184 (Miss. 1996)(quoting R & S Dev., Inc. v. Wilson, 534 So. 2d 1008, 1012 (Miss.
1988)). "It is well recognized that Mississippi is equally firm in its determination that a party will not
be permitted to escape liability because of the lack of a perfect measure of damages his wrong has
caused." Id. (quoting R & S Dev., Inc. 534 So. 2d at 1012.); See also Nichols, 485 So. 2d at 1038.
¶82. Grossnickle gave his opinion as to a reasonable and fair price for oil during the period from
1985 to 1988. His opinion was based on his personal recollection of oil prices during that period. His
personal recollection was based in part on price information that he obtained during that period for
other interests he had in oil production in Oklahoma.
¶83. TXG and Grossnickle both cite the Piney Woods cases to this Court to further their respective
positions. However, the cases are clear as to what the law requires. "Market value is a question of
fact, and it is up to the finder of fact to determine the probative strength of relevant evidence." Piney
Woods Country Life Sch. v. Shell Oil Co., 726 F.2d 225, 238 (5th Cir. 1984). The method of proof
varies with the facts of each particular case. Id. The finder of fact in the present case was the
chancellor. It was his job to determine the relevancy and the weight of the evidence presented by
Grossnickle. Grossnickle had to meet his burden of proof by producing sufficient relevant evidence to
support his contention. It was TXG's responsibility to rebut Grossnickle's evidence and provide
evidence of its own to support its contentions.
¶84. Under Mississippi law, plaintiffs bear the burden of going forward with sufficient evidence to
prove their damages by a preponderance of the evidence. Piney Woods Country Life Sch. v. Shell
Oil Co., 905 F.2d 840, 845 (5th Cir. 1990). The Plaintiff attempted to meet this burden when
Grossnickle testified as to his recollection of financial reports reproduced in the Dallas Morning
News.
¶85. There may have been some speculation as to the certainty of his recollection, but TXG did not
offer any more persuasive testimonial evidence to rebut Grossnickle's estimation. With regard to the
oil price used by Grossnickle, Gary Rehm of TXG testified:
Q. Now, what about on the--would it be your position that the average price of $16.00 a barrel
that Mr. Grossnickle has used for the 1985 through 1988 period is too high, or do you have a
position on that?
A. I don't have a position on that. I do not buy and sell crude.
...
Q. Now, you disagree with the $16.00 that Mr. Grossnickle has used?
A. I said my opinion was it might be high.
...
Q. Are there any other oil prices you wish to give the Court for the period 1985 through 1988?
Average price?
A. No.
¶86. "[W]here the existence of damages has been established, a plaintiff will not be denied the
damages awarded by a [fact finder] merely because 'a measure of speculation and conjecture is
required' in determining the amount of damages." Piney Woods Country Life School, 905 F.2d at
845-46. The chancellor heard all of the testimony and objections to the testimony, as evidenced in the
portion of his opinion above, and found the testimony by Grossnickle to be a reasonable assessment
of the price of oil. This was based largely on the fact that the chancellor did not have before him any
evidence from San Gabriel as to what the price of oil was. San Gabriel did not comply with the order
compelling discovery, forcing the Plaintiff to go to trial without the benefit of any price information
from San Gabriel or any of the defendants for the pre-suit period of production. Even at trial when
TXG was given the opportunity to provide the court with oil prices for the period 1985 through
1988, it did not do so.
¶87. TXG alleges Grossnickle's testimony as to his estimate of the market value of Plaintiff's share of
revenue was also inadmissible as hearsay under Rule 803 of the Miss. R. Evid. We agree the
testimony was hearsay; however, it was admissible as an exception to hearsay under Rule 803 (17) of
the Miss. R. Evid. "It is unquestioned that, in proving the fact of market value, accredited price-
current lists and market reports, including those published in trade journals or newspapers which are
accepted as trustworthy, are admissible in evidence." Virginia v. West Virginia, 238 U.S. 202, 212
(1915); See Thompson v. Carter, 518 So. 2d 609, 612 (Miss. 1987) and Comment to Miss. R. Evid.
803 (17). The chancellor correctly allowed Grossnickle's testimony based on his recollection of the
market reports in the Dallas Morning News.
¶88. The standard of certainty is that discussed earlier by this Court in Cain v. Mid-South Pump,
Co., 458 So. 2d 1048 (Miss. 1984). There the Court stated that all that can be expected is "such
certainty as the nature of the particular case may permit" to "enable the trier of facts to make a fair
and reasonable estimate of the amount of damage." Cain, 458 So. 2d at 1050. At a minimum, proof
could have and should have been submitted of prices in the area for high sulphur oil of like gravity
reflecting monthly price fluctuations over the period.
¶89. We find that it was error for the chancellor to allow the above discussed testimony of
Grossnickle. It lacked sufficient reliability and was impermissibly uncertain to establish and support a
judgment of $97,216 against San Gabriel. On remand reasonable proof should be submitted to enable
the trier of fact to make a fair and reasonable determination as to the amount of damage.
IV. WHETHER THE CHANCELLOR ABUSED HIS DISCRETION OR EVEN HAD
AUTHORITY TO CREATE A JUDGMENT LIEN FOR THE DEBTS OF SAN
GABRIEL ON THE OTHER 62.5% WORKING INTEREST AND FUTURE
PRODUCTION PROCEEDS WHICH WERE OWNED BY ENTITIES NOT A PARTY
TO THIS SUIT.
V. WHETHER THE CHANCELLOR ABUSED HIS DISCRETION OR EVEN HAD
AUTHORITY TO MAKE THE JUDGMENT LIEN SUPERIOR TO THE
PREVIOUSLY PERFECTED SECURITY INTEREST OF MILMAC AND TXG.
VI. WHETHER THE CHANCELLOR ABUSED HIS DISCRETION OR EVEN HAD
AUTHORITY TO MAKE THE JUDGMENT LIEN SUPERIOR TO MILMAC'S
RIGHT TO RECOVER FUTURE OPERATING COSTS.
¶90. The chancellor in his opinion dated March 8, 1994, ruled as follows:
[I]n my opinion, Plaintiff's Second Amended Complaint was sufficiently broad to now permit
the imposition of a lien upon San Gabriel's 62.5% interest in the Mississippi Property and the
proceeds attributable to that interest, subject to the deduction of royalty burdens. Plaintiff's
prayer for an attachment of San Gabriel's interest was sufficient notice of the assertion of the
lien, albeit Plaintiff chose not to pursue the pre-judgment statutory procedure to perfect a
formal attachment. Furthermore, in light of Smith v. Smith, 607 So. 2d 122 (Miss. 1992), it
appears that a specific prayer for a lien is not required. See also M.R.C.P. 54(c). The duration
of such lien being until the sum of $97,216 is paid toward the monetary judgment of $125,
614.85
¶91. The court then entered the following in its Final Judgment:
In addition to all other remedies which Plaintiff has or may have to collect and recover the
monies awarded under this Judgment, Plaintiff is entitled to the imposition of and the Court
hereby awards, orders and imposes a lien on the other 62.5% interest in the Mississippi
Property (the interest not owned by Plaintiff) and on all of the future production proceeds
attributable to that interest (after deduction of only severance taxes and royalty burdens) in
order to satisfy that portion of this Judgment Plaintiff is owed for its share of production
occurring from 1985 through 1988. This lien herein granted and imposed on the 62.5% interest
is and shall be superior to and shall have priority over all liens claimed by the Defendants and
their successors-in-interest and transferees, including but not limited to any liens claimed as a
result of the agreements and assignments entered into by and among San Gabriel, TXG, and
Milmac Operating Company on and after December 19, 1990. However, the claim of any
royalty owner shall not be affected by such lien. The duration of such lien shall be until the sum
of $97,216, owed under paragraph 2(a) above, is paid to Plaintiff toward the total monetary
judgment of $125,614.85.
¶92. San Gabriel owned 100% of the legal title to the Mississippi Property when the suit was filed on
May 20, 1988. The Complaint stated a principal claim to an undivided 37.5% interest in the
Mississippi Property, and an alternative claim for the return of that portion of the $1,500,000 that
was paid for that property. A lis pendens notice was filed on May 20, 1988. Plaintiff filed his Second
Amended Complaint on September 10, 1990, adding TXG as a defendant. The trial court held the
Second Amended Complaint sufficiently broad to permit the imposition of a lien on San Gabriel's
62.5% interest in the Mississippi Property.
¶93. TXG asserts the only claim for a lien on the other 62.5% working interest comes in the "Sixth
Claim." The "Sixth Claim" seeks an attachment of all of San Gabriel's interest in the Mississippi
Property and the production and proceeds therefrom, including the production and proceeds which
come into the hands of TXG. TXG considers this to be an attempt at an Attachment in Chancery
under Miss. Code Ann. § 11-31-1 et. seq.
¶94. Attachment in Chancery is a pre-judgment remedy which serves as an involuntary dispossession
of the defendant prior to any adjudication of the rights of the plaintiff. Federal Sav. and Loan Ins.
Corp. v. S. & W. Constr. Co., 475 So. 2d 145, 147 (Miss. 1985). Attachment is to strictly comply
with the statutory norms and procedures when it is employed. Id.; St. Paul Fire & Marine Ins. Co.
v. Arnold, 254 So. 2d 872, 873 (Miss. 1971). Miss. Code Ann. § 11-31-2 and 3 (Supp. 1997) are
specific as to what must be done in order to obtain an effective Order of Attachment on property and
must be followed closely. Anderson v. Sonat Exploration Co., 523 So. 2d 1024, 1027-28 (Miss.
1988). No Order of Attachment was ever issued in the present case.
¶95. Grossnickle responds by asserting the chancellor's decision to impose a lien can be affirmed on
the basis of the lis pendens notice. However, the chancellor did not find the lis pendens notice
sufficient to impose a lien. Further, Grossnickle states that the chancellor reached the correct decision
because the purchasers (TXG and Enron) had actual notice of Plaintiff's lien claim by virtue of being
parties in the suit and actually receiving a copy of the Second Amended Complaint. According to
Grossnickle, TXG cannot avoid enforcement of the lien remedy requested in the Second Amended
Complaint, because that very complaint joined TXG as a party to this suit and gave TXG actual
notice of Plaintiff's claims for a lien on San Gabriel's share of production before post-suit production
resumed in April 1991.
¶96. TXG next argues the "law of the case" doctrine precludes the Plaintiff from raising a claim to a
lien on the other 62.5% working interest at the accounting phase. TXG asserts that all of the
Plaintiff's claims and issues were resolved by the 1993 Judgment. The only issues left, as stated by
TXG, were "Plaintiff's claims for an accounting, and the questions as to what extent the Limited
Partnership's Interest [37.5%] is subject to any costs or claimed liens." Therefore, the Plaintiff's
attempt to resurrect this issue should be barred by the "law of the case" doctrine.
¶97. The law of the case doctrine, as recognized by this Court, is as follows:
The doctrine of the law of the case is similar to that of former adjudication, relates entirely to
questions of law, and is confined in its operation to subsequent proceedings in the case.
Whatever is once established as the controlling legal rule of decision, between the same parties
in the same case, continues to be the law of the case, so long as there is a similarity of facts.
This principle expresses the practice of courts generally to refuse to reopen what has previously
been decided. It is founded on public policy and the interests of orderly and consistent judicial
procedure.
Simpson v. State Farm Fire and Casualty Co., 564 So. 2d 1374, 1376 (Miss. 1990) (quoting
Mississippi College v. May, 241 Miss. 359, 366, 128 So. 2d 557, 558 (1961)).
¶98. TXG argues that by not reserving the Plaintiff's claim to the 62.5% working interest, the
chancellor ruled against such a right by necessary implication. However, TXG's citations involve res
judicata. Res judicata only applies to final judgments. E.g. State ex rel. Moore v. Molpus, 578 So. 2d
624, 640 (Miss. 1991). Here there was not a final judgment until April 12, 1994, when the
chancellor's Final Judgment was filed in the Holmes County Chancery Clerk's office. The accounting
portion was the second phase to the trial that began in 1993.
¶99. The only issues submitted for trial in January 1993 were whether Plaintiff was the owner of a
37.5% interest in the Mississippi Property, whether San Gabriel held title to that interest in a
constructive trust, and whether legal title to that interest should be vested in Plaintiff. The portion of
the chancellor's opinion dealing with what was reserved for a later determination is as follows:
"Plaintiff's claims for an accounting, and the questions as to what extent the Limited Partnership's
Interest is subject to any costs or claimed liens, have been reserved by the Court for subsequent
determination."
¶100. TXG's argument that the "law of the case" prevented the chancellor from assessing a lien on
the 62.5% working interest is without merit. The only issue that was decided by the March 1993
judgment was the ownership of the 37.5% interest.
¶101. TXG next argues that the chancellor should not have created a lien in April 1994 on the other
62.5% working interest in the Smith Well because its owners were not debtors or parties to the suit.
The Final Judgment created a lien on the other 62.5% working interest's future production proceeds
in order to pay a judgment owed by San Gabriel for the 1985-88 production. In April of 1994, San
Gabriel did not own any of the other 62.5% working interest.(8) The chancellor was made aware of
that fact before entry of the Final Judgment.
¶102. TXG correctly argues to this Court that it was error for the chancellor to impose a lien on
property no longer owned by San Gabriel. "A judgment, when enrolled in Mississippi, becomes a lien
upon the property of the defendant within the county where the judgment is enrolled from the date
of enrollment and priority is established from that day forward." Simmons v. Thomas, 827 F. Supp.
397, 401 (S.D. Miss. 1993) (citing Herrington v. Heidelberg, 244 Miss. 364, 141 So. 2d 717 (1962))
(emphasis added). TXG interprets this to mean that the defendant actually had to own the property at
the time the judgment lien was imposed.
¶103. When property is subject to an enrolled judgment and is subsequently purchased by a third
party in this condition, it is held subject to the right of the creditor to subject it to his judgment.
Willis Hardware Co. v. Clark, 216 Miss. 84, 93, 61 So. 2d 441, 442 (1952). In Willis the judgment
creditor obtained a judgment against the judgment debtor. After the judgment had been enrolled, the
judgment debtor sold fifteen bales of lint cotton to one Clark, who took possession of the cotton and
converted it to his own use. The judgment creditor sued Clark for the value of the cotton. The
holding of the case was that Clark, having disposed of the property, was not liable to the judgment
creditor for a money judgment. Brookhaven Bank & Trust Co. v. Gwin, 253 F.2d 17, 21 (5th Cir.
1958) (explaining the Supreme Court of Mississippi's holding in Willis). The creditor did not have a
writ of execution levied upon the cotton while it was in the hands of Clark so as to obtain a specific
lien thereon, but waited until after Clark had disposed of the cotton and then sought to obtain a
money judgment against Clark for the conversion of the cotton. Id. at 22.
¶104. According to Miss. Code Ann. § 11-7-191, "the lien follows the property and does not
authorize a money judgment against a person who has disposed of the property." Id. "One who
purchases property on which there is an enrolled judgment lien holds it subject to the right of the
judgment creditor to have it seized under a writ of execution for the satisfaction of the judgment." Id.
(quoting Motors Securities Co. v. B.M. Stevens Co., 83 So. 2d 177, 179 (Miss. 1955)). In the
present case, TXG received its rights and interests in the Smith Well prior to the imposition of a
judgment lien by the chancellor. The judgment was not even issued, not to mention enrolled, at the
time TXG received its rights by assignment. The assignment took place in 1992, and the chancellor
imposed the judicial lien in 1994.
¶105. Grossnickle responds by stating all claimed successors to San Gabriel had actual notice of the
ongoing suit, and took their assignments after the Second Amended Complaint was filed on
September 10, 1990. Milmac's December 18, 1990, agreement with San Gabriel recited the existence
of the suit. The June 28, 1992, assignment from San Gabriel to Milmac, which created the
reversionary interest in twenty individuals, stated that it was made in accord with and recited the
existence and filing location of the December 18, 1990, letter. Empiric took its interest from those
persons by assignments in October and November of 1992. The president and chief executive officer
of Empiric is James L. Ling, formerly an officer of San Gabriel. Grossnickle asserts that none of these
persons can claim to be purchasers without notice and in good faith. Also, Grossnickle states that
TXG took its rights with knowledge and subject to this suit and to all of Plaintiff's claims.
¶106. TXG counters Grossnickle's notice argument by stating "one's notice of a claim--indeed one's
actual notice of a judgment--has absolutely no effect on one's rights in property obtained from the
judgment debtor prior to enrollment of the judgment lien." In construing the predecessor to Miss.
Code Ann. § 11-7-191, this Court ruled it to be immaterial whether a third party had knowledge of
the judgment. Johnson v. Cole Mfg. Co., 144 Miss. 482, 489, 110 So. 428, 429 (1926). The Court
stated:
We are of the opinion that these sections give no lien until the judgment is enrolled; that it is the
enrollment of the judgment that creates the lien; and that the judgment roll is not merely for the
purpose of giving notice of a preexisting lien. There being no lien until the enrollment of the
judgment on the property of the Johnson-Harlow Lumber Company, title passed by the deed of
trust to the trustee and by the sale thereunder to Johnson. In other words, the Cole
Manufacturing Company had no legal title or lien that affected the title, and it is immaterial
whether Johnson had knowledge of the judgment or not. The judgment did not attach to
the property under the circumstances stated.
Id. (emphasis added).
¶107. In Kalmia Realty & Ins. Co. v. Hopkins, 163 Miss. 556, 566, 141 So. 903, 904 (1932), KRIC
took a judgment against Russell in August of 1929. On November 30, 1929, Hopkins acquired
property from Russell. Hopkins filed his deed of record on December 3, 1929. The judgment was not
enrolled until December 20, 1929.
It is admitted that [Hopkins] caused the title to the lands to be investigated, and was advised
that the record showed that the title was vested in the proposed vendor, free of all liens except a
deed of trust in favor of the First National Bank of Meridian. The record shows that the
appellee was a bona fide purchaser for value of the property long before the enrollment of the
judgment, and consequently this property was not subject to levy and sale under an execution
based on the judgment.
Id. TXG, therefore, asserts that notice is immaterial because a judgment lien cannot attach to
property of the debtor until the judgment is enrolled.
¶108. The prior case law in this State allows a bona fide purchaser to take free and clear of the
judgment. It would seem that a party with notice of a claim would take subject to that claim.
However, the law is clear that a judgment does not take effect until it is enrolled. This judgment
attaching to the other 62.5% interest, which was to take priority over all other claims, was not
enrolled until April 12, 1994, when the Final Judgment of the chancellor was filed in the chancery
clerk's office in Holmes County. Grossnickle only states that notice was given. There is no citation to
any authority by Grossnickle that would rebut the citation by TXG. We find that the chancellor erred
by imposing the lien on the other 62.5% interests.
¶109. Alternatively, if the chancellor did have the authority to create the judicial lien on the other
62.5%, TXG states he did not have sufficient authority to make the judgment lien superior to a
previously perfected security interest or Milmac's contractual and statutory right to recover the costs
of operating the well. This Court agrees and holds that the alternative argument of TXG still requires
the chancellor's decision to be reversed and rendered.
¶110. Milmac received its interests and rights in the Smith Well from San Gabriel as established in
three documents: the December 18, 1990, letter agreement, the March 18, 1991, supplemental
agreement, and the assignment dated June 28, 1992. At the time San Gabriel executed these
instruments, it still owned legal title to 100% of the leases and full title to 62.5% of the Smith Well
unit and leases. All of these documents were filed no later than July 27, 1992, in the Holmes County
land records.
¶111. Under these agreements, San Gabriel turned over possession of the Smith Well to Milmac and
gave Milmac the specific right to receive and possess all production and proceeds from the Smith
Well. These agreements satisfy the formal requirements for a financing statement as set forth in Miss.
Code Ann. § 75-9-402 (1972). Milmac's security interest in the production and proceeds from the
Smith Well became perfected when it took possession beginning in April 1991. Miss. Code Ann § 75-
9-305(Supp. 1997).
¶112. TXG claims its rights in the Smith Well by way of the December 19, 1990, assignment from
Milmac. It included proceeds from production until 100% of the costs advanced to restore the well to
production had been recovered. Under that agreement, TXG became a partial assignee in all interest
Milmac received from San Gabriel and has the same perfected security interest status. See Miss. Code
Ann. § 75-9-302 (2)(Supp. 1997).
¶113. Therefore, any judgment lien imposed by the chancellor would be subject to the perfected
security interests of Milmac and TXG.
A person who becomes a lien creditor while a security interest is perfected takes subject to the
security interest only to the extent that it secures advances made before he becomes a lien
creditor or within forty-five days thereafter or made without knowledge of the lien or pursuant
to a commitment entered into without knowledge of the lien.
Miss. Code Ann. § 75-9-301 (4)(Supp. 1997).
¶114. Grossnickle responds by stating TXG cannot claim that it was surprised by the Plaintiff
claiming a lien on San Gabriel's share of post-May 1988 production and proceeds, when that was the
relief requested in the Second Amended Complaint. However, the judgment lien did not become
binding or effective until it was enrolled. Therefore, TXG did not have notice of the lien prior to
taking its interest in the Smith Well. The chancellor abused his discretion and authority under
Mississippi law by attempting to prime the previously perfected security interest with the judgment
lien issued two years later. The chancellor's decision is reversed and rendered as to this issue.
VII. WHETHER THE CHANCELLOR PROPERLY DENIED TXG'S MOTION TO
ALTER OR AMEND THE FINAL JUDGMENT TO PROVIDE THAT XENEREX
PARTNER'S 37.5% WORKING INTEREST IN THE SMITH WELL BE SUBJECT TO
ITS SHARE OF FUTURE OPERATING COSTS.
¶115. TXG claims the judgment lien issued by the chancellor should be subject to the payment of
future operating costs attributable to the working interests to which the lien is attached. A working
interest, as discussed earlier, includes the right to produce oil and gas, with the concomitant
obligation to bear all of the costs associated with that right of production. If the working interest is
not subject to the costs of production, it would become a royalty interest, as discussed earlier in this
opinion. The "judgment creditor succeeds to only such rights in the judgment debtor's property as the
judgment debtor actually has." Candler v. Cromwell, 101 Miss. 161, 170, 57 So. 554, 555 (1912).
"The judgment creditor merely succeeds the judgment debtor; that is, takes his place and subjects the
actual interest of the judgment debtor to his demand." Id. TXG further argues under Miss. Code
Ann. § 53-3-7 (Supp. 1997) and the 1980 Order of Integration by the Mississippi State Oil and Gas
Board, all interests in production from the Smith Well are subject to the operator's right to recoup all
costs of operation.
¶116. Because the interests in the Smith Well were working interests, this Court holds that any lien
attached to those interests does not take precedent over the type of interest in the well, by changing
the very nature of the interest. In other words, TXG is correct in stating if the judgment lien is not
subject to the future operating costs of the well, the interest is changed from a working interest into a
royalty (non-cost bearing) interest. Thus, the chancellor should have amended his Final Judgment to
provide that Xenerex's 37.5% working interest in the Smith Well be subject to its share of future
operating costs. This issue is remanded with instructions for the chancellor to subject Xenerex's
37.5% working interest to its pro rata share of future operating costs when rendering the Final
Judgment.
VIII. WHETHER THE CHANCELLOR PROPERLY DENIED TXG'S MOTION FOR
JOINDER AND SUBSTITUTION OF PROPER PARTIES PLAINTIFF, ESPECIALLY
EMPIRIC ENERGY, INC.
IX. WHETHER THE CHANCELLOR PROPERLY DENIED TXG'S REQUEST TO
AMEND THE FINAL JUDGMENT TO REFLECT THE OWNERSHIP AND
OBLIGATIONS OF EMPIRIC IN THE SMITH WELL AND LEASES.
¶117. By January 22, 1993, Empiric was a reversionary owner of the other 62.5% working interest
and owner of 52.8% of the Xenerex 37.5% working interest. After the January 22, 1993, assignment
from Plaintiff, DJN, Inc., Dean V. Grossnickle (individually), Albert Susman, and Empiric Energy,
Inc. owned all of Plaintiff's interest in both the Smith Well and the outcome of the litigation. On
January 6, 1994, TXG moved to either join or substitute those four owners under Miss. R. Civ. P. 19
and 25. On January 24, 1994, the chancellor overruled the motion stating:
The Court's of the opinion that that [sic] motion should be overruled basically for two reasons.
First, the motion is not timely in that the assignment of interest that the parties TXG now seeks
to bring in were made a year or more ago. TXG makes no claim that the assignment of interest
has only now come to its attention. In fact, the assignments of Stasio, Martin, and Pettigrew
were introduced in the trial of this cause a year ago as Exhibits 69, 70, 71.
Furthermore, the Court is of the opinion that the Joinder of Plaintiff's Successors in Interest is
not needed in order to facilitate the conduct of this action, or to enable the Court to enter a
Judgment which is binding on the Plaintiff's successors in interest.
Section 25(c) of the Mississippi Rules of Civil Procedure expressly grant to the Court the
power to continue an action, even though there are subsequent transfers of interest. The
comment to that rule provides that any judgment entered is binding on the successors in interest
to the named parties
¶118. It is the January 22, 1993, assignment from the Plaintiff of the Smith Well, the leases, and all
interest in the litigation, which gave Empiric ownership of the Smith Well and leases. This assignment
did not take place until after the first trial. TXG claims there is nothing in the record to indicate that
Plaintiff made TXG aware of the assignment. TXG states it discovered the assignment in the public
records of Holmes County months later, while preparing for trial on the accounting phase of this
matter.
¶119. Miss. R. Civ. P. 19 (a) requires a person to be joined as a party if feasible:
A person who is subject to the jurisdiction of the court shall be joined as a party in the action if:
(1) in his absence complete relief cannot be accorded among those already parties, or
(2) he claims an interest relating to the subject of the action and is so situated that the
disposition of the action in his absence may (i) as a practical matter impair or impede his ability
to protect that interest or (ii) leave any of the persons already parties subject to a substantial
risk of incurring double, multiple, or otherwise inconsistent obligations by reason of his claimed
interest.
If he has not been so joined, the court shall order that he be made a party. If he should join as a
plaintiff but refuses to do so, he may be made a defendant or, in a proper case, an involuntary
plaintiff.
Empiric, as owner of certain percentages in the working interests in the Smith Well and interests in
the litigation, is a necessary, indispensable party under the above rule. See Ladner v. Quality
Exploration Co., 505 So. 2d 288, 290-91 (Miss. 1987) (undivided mineral interest owners were
deemed necessary, indispensable parties to any action by landowners against mining company for
subsurface damage).
¶120. Because Empiric, DJN, Grossnickle, and Susman all acquired their interest by transfer from the
Plaintiff after the suit was filed, Miss. R. Civ. P. 25 (c) applies. However, both rules are to be viewed
together, and not as one trumping the other. In Johnson v. Weston Lumber & Bldg. Supply Co.,
566 So. 2d 466, 469 (Miss. 1990), this Court held that a transferee, who obtained his interest in the
property just a little more than a month before the chancellor's judgment was rendered, was an
indispensable party and should be joined under Miss. R. Civ. P. 19 (a). Likewise, this Court holds
that Empiric was an indispensable party and should have been joined upon TXG's motion on January
6, 1994.
¶121. Empiric's interest in this case is substantially different from the other successors to Xenerex. It
was not represented by Plaintiff's attorney. It was also a successor to San Gabriel's interest in the
other 62.5% working interest. Empiric was created and run by the same person who signed the
agreements on behalf of San Gabriel to induce Milmac and TXG to fund restoration of the Smith
Well beginning in December 1990. Empiric was willing to waive service of process and stipulate that
any interest it succeeded to out of Xenerex was also subject to the right of Milmac and TXG to
recover costs.
¶122. TXG asserts the chancellor's refusal to make Empiric a party in this case prevented complete
relief and subjected TXG to a substantial risk that Empiric's 52.8% share of Xenerex's 37.5%
working interest will now not be subject to any restoration costs, even though Empiric has admitted
that it should. Empiric, as a reversionary owner of the other 62.5% working interest, has a substantial
stake in the chancellor's determination that its interest is now subject to a lien in favor of the Plaintiff.
¶123. The chain of title from the Plaintiff to Empiric was admitted into evidence by the chancellor
and is essentially undisputed. A waiver of process, a deposition, and a stipulation all given by Empiric
made it clear that Empiric admits that its share of Xenerex's 37.5% working interest should be subject
to Milmac and TXG's right to recover costs they incurred in restoring and operating the Smith Well
after December of 1990.
¶124. Grossnickle responds that only TXG moved to have Empiric joined as an indispensable party
under Miss. R. Civ. P. 19. The assignments make an express reference to the pendency of this
litigation. However, none of those assignees ever sought, on their own, to join this case, according to
Grossnickle.
¶125. Grossnickle makes an argument that TXG did not make a timely motion to join Empiric under
Miss. R. Civ. P. 19. Grossnickle asserts TXG knew about the assignments to Empiric since at least
the January 1993 trial, where they were introduced into evidence. The January 1993 assignment by
Plaintiff was recorded on January 25, 1993. However, the record does not contain the assignment to
Empiric.
¶126. Grossnickle distinguishes Johnson, by stating the Court actually held a post-litigation
transferee who seeks to be joined under Rule 19 and demonstrates that he is a necessary party should
be joined. He summarizes his argument by stating TXG "needs" Empiric as a party, not to facilitate
the end of the case, but rather to delay the case.
¶127. Procedural due process requires that parties who have rights that will be affected are entitled to
be heard. Aldridge v. Aldridge, 527 So. 2d 96, 98 (Miss. 1988). It is then elementary that it would be
a violation of due process for a party whose rights are to be affected to not be heard. However, TXG
was the moving party attempting to join Empiric under Miss. R. Civ. P. 19. Empiric was apparently
amicable to being joined; yet, it did not make a motion on its own to be joined. Because this Court
finds that Empiric should have been joined as a party under Rule 19 as a result of the undue burden
placed on TXG, we do not reach the assignment of error under Miss. R. Civ. P. 25. The chancellor
abused his discretion in denying such joinder as requested. On remand, Empiric should be joined as a
party to this action under Miss. R. Civ. P. 19.
X. WHETHER THE CHANCELLOR'S FAILURE AND/OR REFUSAL TO MAKE
FINDINGS OF FACT AND CONCLUSIONS OF LAW ON ISSUES IV.--IX., ABOVE,
IS REVERSIBLE ERROR.
¶128. TXG asserts the chancellor abused his discretion in failing to make adequate findings of fact
and conclusions of law for the imposition of the lien and why it was to be superior to previously
perfected security interests. TXG states the chancellor ignored its specific request for additional
findings "setting forth the basis for the imposition of such a lien." TXG contends that because of this
request, the chancellor was required to set forth the factual and legal basis for creating such a lien.
Miss. R. Civ. P. 52. It goes without saying that this case is extremely complex, and highly contested
with numerous factual issues in dispute, as attested by such a lengthy opinion.
[I]n cases of any complexity, tried upon the facts without a jury, the Court generally should find
the facts specially and state its conclusions of law thereon.
As in other areas, we will not interfere with a trial court's exercise of its discretion unless that
discretion be abused. Where, however, a case is hotly contested and the facts greatly in dispute
and where there is any complexity involved therein, failure to make findings of ultimate fact and
conclusions of law will generally be regarded as an abuse of discretion.
Tricon Metals & Services, Inc. v. Topp, 516 So. 2d 236, 239 (Miss. 1987). This Court remanded in
that case for the chancellor to make findings of fact separately from it conclusions of law.
¶129. Grossnickle responds that TXG's objection is unmerited by claiming generalized findings of
fact and conclusions of law are technically sufficient under Miss. R. Civ. P. 52 (a). TXG cites the
holding in Lowery v. Lowery, 657 So. 2d 817 (Miss. 1995), where this Court held the trial court
must provide findings of fact and conclusions of law upon request when the court fails to even make
a generalized finding of fact and conclusions of law.
¶130. Where "there are no specific findings of fact, this Court will assume that the trial court made
determinations of fact sufficient to support its judgment." Century 21 Deep South Prop., Ltd. v.
Corson, 612 So. 2d 359, 367 (Miss. 1992). The chancellor in his March 8, 1993, Opinion stated in
one paragraph his reasons for imposing the lien. In Lowery, we further interpreted our holding in
Corson, stating "a court has technically complied with the mandates of Rule 52 where it makes
general findings of fact and conclusions of law although requested by a party to make specific
findings." Lowery, 657 So. 2d at 819.
¶131. The Court finds the chancellor made a sufficient generalized finding of fact in his opinion and
did not abuse his discretion in failing to make specific findings of fact. He was correct in complying
with Miss. R. Civ. P. 52 under the holdings of this Court at the time. The chancellor did not have the
benefit of the Lowery decision, as it was decided in 1995, since the chancellor rendered his opinion in
1994. This case is to be remanded on other issues and the Court finds there were no special findings
of fact by the chancellor. Therefore, because the facts and issues are so convoluted and complex, this
Court instructs the chancellor on remand to make separate and specific findings of fact and
conclusions of law.
CROSS-APPEAL
I. WHETHER THE LOWER COURT ABUSED ITS DISCRETION BY EXCLUDING
PLAINTIFF'S EVIDENCE OF THE VALUE OF THE NATURAL GAS PRODUCED
AND SOLD FROM THE GAS WELL AT ISSUE DURING THE PERIOD FROM 1985
UNTIL 1988, AND DENYING PLAINTIFF A JUDGMENT FOR THAT AMOUNT OF
MONEY.
¶132. Following the trial, the court ruled that Exhibit 104 was not admissible as to gas values:
Mr. Grossnickle estimated the average value of the gas to be 4[7]½ cents per MCF, but he
admitted to having no knowledge of the value of gas or what price San Gabriel received during
the period. He rested his estimate solely on the price of gas as agreed upon in gas contracts
executed between TXG and San Gabriel after 1988. This evidence, even if uncontroverted, was
entirely too speculative to support a judgment.
¶133. Where it is reasonably certain that some damage happened, the recovery of damages is not
precluded by uncertainty as to amount. Nichols , 485 So. 2d at 1038. Grossnickle asserts Wall v.
Swilley, 562 So. 2d 1252, 1255 (Miss. 1990), as authority for proof of value of a commodity is not
inadmissible because the proof relates to the commodity's value as of a different date than the date at
issue in the case; the "time gap" goes to the weight of the evidence, not the admissibility.
¶134. Grossnickle's opinion as to a fair and reasonable price was based on his personal knowledge of
the prices which were paid for gas produced from the Smith Well after May 1988, 47.5 cents per
MCF. TXG put on evidence of the actual prices paid for gas produced by the Smith Well from 1985
to 1988:
Q. You said during the course of that, you reviewed gas contracts, one or more gas contracts,
which showed you that the price which had been paid for gas prior to that was what?
A. To my best recollection, it was 37-and-a-half cents out of the Smith Well, for MCF.
Q. You are here to tell the Court that you acquired some knowledge that the prices paid prior
to 1990 were 37-and-a-half cents?
A. To the best of my recollection--I do not have the old contracts with me, but to the best of
my recollection, we started out with a higher price of 40 cents. It was up by 2-and-a-half cents.
¶135. Grossnickle asserts that the evidence was admissible under Swilley, and also as testimony by an
owner. E.g., Thomas v. Global Boat Builders & Repairmen, Inc., 482 So. 2d 1112, 1116 (Miss.
1986). He also claims that because of San Gabriel's refusal to answer discovery the evidence from the
old contracts was the only gas pricing information that he had, and he should be afforded more
discretion. Rehm testified from his personal knowledge that 37 ½ cents was the contract price, at a
time prior to 1990, for gas purchased from the Smith Well. Grossnickle argues that it was error for
the chancellor to exclude Exhibit 104 as to gas prices.
¶136. Grossnickle's arguments are misplaced and without merit. First, in Swilley testimony was
allowed by an expert real property appraiser. Swilley, 562 So. 2d at 1255-56. It does not support the
lay testimony of an admitted non-expert like Grossnickle. Therefore, Grossnickle should have had
personal knowledge of gas prices from 1985-88. He did not have such personal knowledge and only
testified as to gas contracts post-1988. This Court holds that his testimony was correctly excluded
based on this reason alone.
¶137. Second, TXG argues that Rehm's testimony as to his recollection of a review of written gas
purchase contracts was inadmissible hearsay. TXG claims that Rehm's testimony as to a price for
some unspecified, undefined time "prior to May 1990" is far from specific enough to establish the
price paid for gas from 1985-88. TXG asserts that this, at best, impeaches Grossnickle's testimony.
¶138. TXG's second argument as to hearsay is without merit. Gary Rehm was called to testify by
TXG. He was the director of facilities at TXG. There was no objection made at trial as to his
testimony. "In order that there be preserved error for this Court to review, there must be a
contemporaneous objection." Holt v. State, 650 So. 2d 1267, 1271 (Miss. 1994). At no time did TXG
ever offer an objection to the testimony of Rehm.
¶139. Rehm testified that he was the director of marketing for TXG Gas Marketing Company. All of
the testimony of Rehm was an admission by a party opponent under Rule 801(d)(2) of the Miss. R.
Evid.(9) Miss. R. Evid. 801(d)(2)(D) provides that a statement made by an agent or servant
concerning a matter within the scope of his agency or employment, made during the existence of the
relationship is an admission of the party. TXG cannot be allowed to claim testimony of Rehm, who
was its director of facilities and director of marketing at the time of his testimony, was hearsay just
because TXG does not agree with the content of his testimony. It was clearly an admission by an
agent or servant (employee) of TXG at the time of his employment. TXG qualified his position in the
preliminary questioning of Rehm. TXG should have known the stance and content of Rehm's
testimony prior to calling him to the stand.
¶140. This Court holds that the testimony of Rehm was admissible as an admission by a party.
However, it is irrelevant and moot as the testimony of Grossnickle was properly excluded by the
chancellor. Grossnickle's assignment of error on the cross-appeal is without merit.
CONCLUSION
¶141. This case is fact intensive and the issues are convoluted. The chancellor committed reversible
error by not considering the costs incurred by TXG to restore the Smith Well during the accounting
phase of the trial. The testimony by Grossnickle as to the value of oil produced from 1985-88 was
insufficiently reliable to be considered in rendering the judgment against TXG. As this case is to be
remanded for a new trial to allow consideration of the costs incurred by TXG, evidence sufficient to
enable the trier of fact to make a fair and reasonable estimate as to the amount of damage will have to
be submitted to the trier of fact.
¶142. The chancellor did not have the authority to create a lien in the other 62.5% working interest
to take precedent over the interests already vested in other parties. The judgment lien did not become
binding until it was enrolled. In the case sub judice, the lien was not enrolled until after the interests
in the third parties became vested. The chancellor erred by imposing the lien on the other 62.5%
interest, and his decision thereon is reversed and rendered.
¶143. The chancellor abused his authority by attempting to prime TXG's previously perfected
security interest in the Smith Well from 1992 by imposing a judicial lien in 1994. Milmac had met the
requirements for perfection of a security interest in the Smith Well at the latest in 1992. The
judgment lien did not take effect until the chancellor rendered his Final Judgment in 1994. Therefore,
when TXG received its rights in the Smith Well by way of assignment from Milmac in 1990, it was
impossible for TXG to have known about a lien that did not exist at that time.
¶144. The chancellor should have amended the final judgment to provide that the Xenerex 37.5%
working interest in the well should be subject to its pro rata share of future operating costs. If the
working interest is allowed to escape the burden of cost of production, it will be changed from a
working interest into a royalty interest.
¶145. The chancellor committed error by not joining Empiric Energy as a party to the suit. Empiric's
rights in the property interests that it had acquired were clearly affected by the judgment rendered by
the chancellor. Although TXG made the motion for joinder and not Empiric, Empiric's due process
rights were violated when the motion was denied. Alternatively, TXG would suffer an undue burden
by bearing greater costs than it should if Empiric is not joined to this action. On remand this Court
directs the lower court to join Empiric as a party to this action.
¶146. TXG's contention that the chancellor abused his discretion for not having made adequate
findings of fact and conclusions of law is without merit. According to Lowery, Miss. R. Civ. P. 52 (a)
has been complied with if generalized findings of fact and conclusions of law have been made by the
chancellor. Since this case is to be remanded on other issues, and considering the complexity of the
factual and legal issues involved, we direct the chancellor on remand to make separate and specific
findings of fact and conclusions of law.
¶147. On the cross-appeal, Grossnickle's assignment of error is without merit. His testimony as to gas
prices during the period of 1985-88 was properly excluded from evidence because he had no personal
knowledge of the prices during that time frame. He testified as to prices subsequent to 1990. The
chancellor's decision is affirmed as to the cross-appeal.
¶148. ON DIRECT APPEAL: REVERSED AND RENDERED IN PART; REVERSED AND
REMANDED IN PART. ON CROSS-APPEAL: AFFIRMED.
PRATHER AND SULLIVAN, P.JJ., PITTMAN, BANKS, McRAE, SMITH AND MILLS, JJ.,
CONCUR. LEE, C.J., CONCURS IN RESULT ONLY.
1. That footnote reads as follows:
It is notable that TXG does not claim that it can recover the 100% penalty which San Gabriel
promised Milmac and which Milmac agreed to divide with TXG. That is, of course, because
that penalty is a finance charge which, even if paid, neither San Gabriel nor any other party can
charge to the limited Partnership's interest. See Pursue Energy Corp., 524 So. 2d at 571-72
(holding that interest expense is not a required cost of operation). (emphasis in original)
2. Included was a letter from San Gabriel which stated:
Following is information received from Milmac Operating Company (operator of the Smith
Well since May 1990) showing total costs related to the well of $825,067.88 through 1991 [sic]
. We are still trying to get cost figures from them for 1992 and 1993.
Under the agreement with Milmac, they recover 200% of their costs, before San Gabriel (and
its successors and assigns) participate in revenues. Accordingly, through 1991, Milmac would
be entitled under the agreement to recover $1,650,135.76 (subject to audit of their costs).
3. 2. Under the terms of the letter agreements dated December 18, 1990, December 19, 1990, and
June 6, 1991, of which this Court is familiar, TXG agreed to pay Milmac for the costs of certain
repairs, reworking and improvements to the Smith Well in exchange for an assignment of 100% of
San Gabriel's interest in the well which had previously been assigned to Milmac. Additionally, TXG is
the purchaser of natural gas from the well.
3. Under Mississippi law, amounts paid by TXG for the purchase of natural gas are first applied
to recoup expenses necessary to cause the well to be capable of production before the Plaintiff
is entitled any revenue from the well. Since these costs have not yet been recovered, the
Plaintiff has no right to any revenue attributable to its interest. See Mills v. Damson Oil Corp.,
931 F.2d 346, 349-50 (5th Cir. 1991).
4. Both TXG and Milmac take the position that although Xenerex Partners, Ltd. has been adjudicated
the owner of 37.5% interest in the Smith Well, that interest is subject to its proportionate share of the
operating costs and reworking costs of the well. As a co-tenant with the other working interest
owners, they should not receive any revenue from the well until their proportionate share of the costs
have [sic] been paid.
5. TXG claims that, based on one or more letter agreements which it claims to have with Milmac
Operating Company ("Milmac"), Milmac is entitled to receive the proceeds. The existence of and the
extent to which someone may claim to have a lien on production proceeds are issues in this case.
R.E. 357.
6. IT IS FURTHER ORDERED that Defendants shall provide Plaintiff with an accounting for all
production, proceeds from production, and claimed costs and liens relating to the Limited
Partnership's Interest, said accounting to be provided to Plaintiff's counsel within thirty (30) days
from the date that this Judgment is entered. The parties are then granted sixty (60) days from the date
that the accounting is provided in which to confer, exchange information, and documents and
conduct discovery on any questions relating to the accounting and whether and to what extent the
Limited Partnership's Interest may be subject to any claimed costs or liens. The Court will then set a
date to hear and resolve the remaining claims and issues.
7. The reasons were as follows:
1) The proposed amendment will result in delay and additional issues and claims being raised.
a) Additional pleadings would be required in response to the amendment, such as Plaintiff's
answer and defenses to the proposed counterclaim.
b) Plaintiff would have a right to discovery on TXG's new defenses and counterclaim.
c) The court would need to hear and decide Plaintiff's Motion (filed January 17) which seeks to
exclude evidence on the new defenses and counterclaim because of TXG's insufficient and non-
responsive discovery answers filed on January 10. Alternatively, the Court would have to order
TXG to provide meaningful answers.
d) The amendment would apparently [sic] allow TXG to take the proposed deposition of
Empiric Energy, notwithstanding the apparent irrelevance of the proposed testimony ("Empiric
agrees with TXG, etc.")
2) The proposed amendment will deprive Plaintiff of the benefits of the October 1993 Order
which prohibits San Gabriel (and, we submit, its successors) from introducing any evidence of
any claimed costs and liens relating to the interest in question.
3) The proposed amendment will deprive Plaintiff of meaningful notice of and discovery on
TXG's defenses and counterclaim, not to mention the notice and discovery Plaintiff is entitled to
under the Rules.
a) The only party who has previously asserted any claim of recoupment is San Gabriel, per a
defense of recoupment in its 1990 answer. Accordingly, Plaintiff concentrated his discovery
efforts on San Gabriel. Those efforts resulted in the October 1993 Order which, because of San
Gabriel's failure to comply with its terms, prohibits San Gabriel (and its successors) from
introducing any evidence of any claimed costs and liens relating to the Limited Partnership's
Interest.
b) No one else has asserted the defenses and claims wh ich TXG now seeks to assert. For
example, in October 1991, Plaintiff took TXG's deposition, and in June 1993, Plaintiff obtained
TXG's answers to discovery requests. In neither of those discovery exercises did TXG assert
any of the defenses and claims it now seeks to assert.
c) The Court's March 1993 Judgment put TXG on notice that the Court would take up
"Plaintiff's claims for an accounting," and "whether and to what extent the Limited Partnership's
Interest may be subject to any claimed costs or liens."
d) In June 1993, TXG filed discovery answers stating (under oath) that TXG "has no
information concerning the costs and expenses of the Smith Well." TXG's Answer to Inter.
No. 40. At no point in any of those answers did TXG make or disclose that it had any claim or
lien for well costs. TXG clearly was taking a "hands off" position on the issues of whether and
what were the claimed costs and liens relating to the Interest, and who claimed to be owed.
e) In June 1992, San Gabriel assigned all of its interest to Milmac for a term until Milmac has
recovered 200% of the well costs. Milmac, however, never has sought to join this case or assert
any claim or lien, perhaps content with a 200% cost recovery out of San Gabriel's 62.5%
interest. Under Rule 25(c), it was not necessary for Milmac to move to join this case, or for
anyone else in the case to join Milmac involuntarily. As a successor to a party to the suit (San
Gabriel), Milmac has been bound by all of the prior and subsequent proceedings in this case
(e.g., discovery requests to San Gabriel, San Gabriel's "answers," the March 1993 Judgment,
and the October 1993 Order). TXG, as a claimed successor to San Gabriel and Milmac, is
in no better position to assert new defenses and a counterclaim than is San Gabriel or the
silent Milmac.
(emphasis in the original).
8. By assignment dated June 28, 1992, San Gabriel assigned all of its right, title and interest in the
Smith Well and the Mississippi Properties to Milmac, until 200% of the costs had been recouped,
then to 20 parties identified in Exhibit C to the Assignment. The assignment has been filed of record
since July 1992. In October and November, 1992, Empiric subsequently acquired the interest of all
20 reversionary owners.
9. The comment to Rule 801(d)(2) provides in pertinent part:
(C) The general principle survives that a statement by an agent authorized to speak by a party is
tantamount to an admission by a party. . . .
(D) The common law required that the agent's statement be uttered as part of his duties, i.e.,
within the scope of his agency. 801(d)(2)(D) regards this rigid requirement and admits a
statement "concerning a matter within the scope of his agency" provided it was uttered during
the existence of the employment relationship. (emphasis in the original).