R & R Resources Corporation v. Echelon Oil and Gas, L.L.C. Tex-El Oil and Gas, Inc. And BairTex Energy, Inc. ( 2006 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-05-00479-CV
R & R Resources Corporation, Appellant
v.
Echelon Oil and Gas, L.L.C.; Tex-El Oil and Gas, Inc.;
and BairTex Energy, Inc., Appellees
FROM THE DISTRICT COURT OF FAYETTE COUNTY, 155TH JUDICIAL DISTRICT
NO. 2005V-107, HONORABLE DAN R. BECK, JUDGE PRESIDING
MEMORANDUM OPINION
This is an accelerated appeal from an order granting a temporary injunction. R & R
Resources Corporation is the operator and a working interest1 owner of three oil and gas wells—the
Ullrich, Goebel Brothers, and Toennis—located in Fayette County. Echelon Oil and Gas, L.L.C.,
Tex-El Oil and Gas, Inc., and BairTex Energy, Inc. are also working interest owners. R & R
Resources appeals a temporary injunction entered against it that prevents it from opposing the
designation of Leexus Oil & Gas, L.L.P. as the new operator of the Ullrich and Goebel Brothers
wells. R & R Resources challenges the trial court’s order as an abuse of discretion, arguing that the
1
A “working interest” is the operating interest under an oil and gas lease that is subject to
all costs of exploration and development. 8 Patrick H. Martin & Bruce M. Kramer, Williams &
Meyers Oil and Gas Law, Manual of Terms 1191 (2004).
order violated the rules of equity and that Echelon, Tex-El, and BairTex did not demonstrate
standing to seek injunctive relief, a probable right of recovery, or irreparable injury. R & R
Resources’s reply brief added two issues: (i) that R & R Resources was denied an opportunity to be
heard at a subsequent status hearing on September 9, 2005, and (ii) that the trial court’s order was
impermissibly speculative. Because we find that the trial court did not abuse its discretion by
granting the temporary injunction, we affirm the trial court’s order.
BACKGROUND
Echelon, Tex-El, and BairTex are in the business of purchasing and selling interests
in oil and gas producing properties. As part of this business, Echelon, Tex-El, and BairTex
purchased certain working interests in the Ullrich, Goebel Brothers, and Toennis oil and gas wells.2
The parties operate the wells under two identical joint operating agreements, the 1989 American
Association of Petroleum Landmen Form 610 Model Form Operating Agreements. These forms are
agreements between oil and gas lease owners and interest holders for the exploration and
development of oil and gas within the “contract area” described in the agreements. The agreements
in this case designate R & R Resources as the “Operator,” that conducts, directs, and controls
operations in the contract area. All other parties to the agreements—Echelon, Tex-El,3 and
BairTex—are designated as “Non-Operators.”
2
While these working interest owners bear the costs of exploration and development, they
also own a share of the production of oil and gas from the wells.
3
Tex-El Oil and Gas, Inc. was previously known as Raytex Energy, Inc.
2
The parties conducted business through their respective corporate presidents:
Frederick Doutel, Jr. of R & R Resources, Roger Slayton of Tex-El, Randal Snider of Echelon, and
Warren Bair of BairTex. On November 14, 2003, after Slayton complained to Doutel about R & R
Resources’s operations and accounting procedures concerning the wells, Doutel sent an e-mail
offering to arrange for Slayton to “take over operations on [the] Goebel, Ullrich and/or Toennis”
wells “th[at] afternoon.” Later that day, Doutel sent another e-mail to Slayton stating, “Sorry, we’ll
do it December 1st. You will be the operator.”
Shortly afterward, Slayton sought to audit R & R Resources’s books and requested
that, at the completion of the audit, the parties sign the Texas Railroad Commission’s P-4 forms that
would change the operator to Echelon.4 On November 24, 2003, Doutel wrote a letter to Slayton,
copied to Snider and Bair, stating that R & R Resources would convey operations of the Ullrich and
Toennis wells but would retain operation of the Goebel Brothers well. His letter also stated that
R & R Resources was “working up a letter agreement regarding conditions for operator transfer,”
including a requirement that the new operator use particular vendors. Tex-El, Echelon, and BairTex
audited R & R Resources’s books in December 2003, but afterward Doutel did not sign the P-4
forms.
Unsuccessful in its attempts to have R & R Resources transfer operation of the wells,
Echelon, Tex-El, and BairTex retained counsel. Their attorney wrote to Doutel on April 30, 2004,
advising that his clients, who were “majority interest” owners in the three wells, had voted to remove
4
Slayton’s letter to Doutel stated that Echelon was in the process of obtaining an operator
number from the Texas Railroad Commission so that Echelon could take over operation of the wells.
3
R & R Resources as operator for “good cause” pursuant to the joint operating agreements’ terms.
The letter proceeded to list the ways in which R & R Resources had “failed and refused to act as a
reasonably prudent operator.” Counsel’s letter also demanded that R & R Resources: (i) relinquish
operation of the wells to a new operator to be designated by Echelon, Tex-El, and BairTex, and (ii)
pay a refund owed to them. Doutel’s May 28 response letter denied the request to relinquish
operation of the wells and stated that he had instructed his accountant to remit the funds due to
Echelon, Tex-El, and BairTex within ten days.5 Doutel’s response did not address the other
allegations in counsel’s letter. Bill Jaehne of Leexus Oil & Gas also called Doutel to ask whether
he would turn the operations over to Leexus, but Doutel refused.
Almost four months after sending its demand letter, Echelon, Tex-El, and
BairTex (collectively, the “Non-Operators”) requested the Texas Railroad Commission’s approval
of single-signature P-4 forms designating Leexus Oil & Gas, L.L.P. as the new operator of the three
wells. The request explained that, although R & R Resources had been removed as operator under
the terms of the joint operating agreements because of its “operational and/or billing discrepancies,”
R & R Resources refused to cease operations and transfer the P-4s to another operator. The
Commission requested a response from R & R Resources in support of R & R Resources’s good
faith claim to operate the leases. It noted that R & R Resources was not required to refute Leexus’s
5
At the temporary injunction hearing, Slayton testified that the refunds were not paid until
about sixty days after R & R Resources’s letter, which was seventeen months after the well was
drilled.
4
good faith claim but only to substantiate R & R Resources’s own good faith claim to operate the
wells.
On November 19, 2004, after R & R Resources responded with copies of the wells’
leases and operating agreements, the Commission informed the parties that “[w]hether Leexus is
entitled to become the designated operator of the subject leases appears to turn on the question of
whether the owners of a majority of the working interest in the leases had the right to remove R & R
Resources as operator.” The Commission stated that it lacked jurisdiction to construe the terms of
the operating agreements, determine what constituted “good cause” for removal under the
agreements, and otherwise determine the parties’ contractual rights. Accordingly, it deferred these
determinations to the courts and declined to process the single-signature P-4s.
The Non-Operators filed suit against R & R Resources on May 18, 2005, and sought
a temporary injunction. On July 1, 2005, after a two-day hearing held on June 15 and 17, the trial
court entered an order preventing R & R Resources from opposing the designation of Leexus as the
operator of the Ullrich Lease and Goebel Brothers Lease.6 In summary, the order enjoined R & R
Resources from
• refusing to join in the immediate execution and delivery of proper joint form P-4s designating
Leexus as the operator for and of the Ullrich Lease and Goebel Brothers Lease;
• interfering, opposing, preventing or refusing to cooperate with Plaintiffs’ and/or Leexus’s
efforts to file and obtain approval from the Texas Railroad Commission of joint form P-4s
6
The temporary injunction order was inapplicable to the Toennis well. The record shows
that, of the three wells in the underlying suit, the Toennis is the only well that is not expressly
covered by a joint operating agreement.
5
designating Leexus (for Commission purposes) as the operator of the Ullrich Lease and Goebel
Brothers Lease;
• further operating or performing operations on the Ullrich Lease and Goebel Brothers Lease
following the Commission’s approval of the joint form P-4s;
• interfering, opposing, preventing or refusing to cooperate with Leexus’s operation of the Ullrich
Lease and Goebel Brothers Lease, following the Commission’s approval of the joint form P-4s;
and
• refusing to deliver to Leexus—upon the Commission’s approval of Leexus’s joint form P-4
operator status for the Ullrich Lease and Goebel Brothers Lease—the well files, records, data,
and all other documentation relating to the previous operation of the leases or necessary to
continue the operation of the leases.
The trial court entered findings of fact and conclusions of law concerning the
temporary injunction. When R & R Resources did not comply with the injunction, the Non-
Operators sought this Court’s emergency enforcement of the order pending resolution of R & R
Resources’s interlocutory appeal. We granted the motion.
After R & R Resources did not comply with our order enforcing the trial court’s
temporary injunction, the Non-Operators filed a motion for contempt, and R & R Resources filed
a motion for reconsideration of our order based on an in camera inspection of documents that the
trial court was to begin on or about November 4, 2005. We have not received any order that the
court may have entered during or subsequent to the pretrial hearing on October 12, 2005. We
referred enforcement of this Court’s order to the trial court for findings and recommendations
concerning R & R Resources’s compliance with our order enforcing the trial court’s order. See Tex.
R. App. P. 29.4(b); In re Sheshtawy, 154 S.W.3d 114, 124-125 (Tex. 2004). We have not received
the trial court’s findings and recommendations. Jury trial is set for January 18, 2006, to determine
6
whether the Non-Operators are entitled to declaratory relief and damages for R & R Resources’s
alleged breach of the joint operating agreements’ terms governing the accounting and operation of
the wells.
ANALYSIS
Standard of Review
The purpose of a temporary injunction is to preserve the status quo of the litigation’s
subject matter pending a trial on the merits. Butnaru v. Ford Motor Co., 84 S.W.3d 198, 204 (Tex.
2002). Injunctions may also issue when the status quo is not a condition of rest but of action,
because the condition of rest will inflict irreparable injury on the complainant. RP&R, Inc. v.
Territo, 32 S.W.3d 396, 401 n.3 (Tex. App.—Houston [14th Dist.] 2000, no pet.). To obtain a
temporary injunction, the applicant must plead and prove a cause of action against the defendant, a
probable right to the relief sought, and a probable, imminent, and irreparable injury in the interim.
Butnaru, 84 S.W.3d at 204.
The decision to grant or deny a temporary injunction lies within the sound discretion
of the trial court, and we will not disturb that decision absent a clear abuse of discretion. Id. at 204.
This Court may neither substitute its judgment for that of the trial court nor consider the merits of
the underlying lawsuit; we consider only the validity of the order. Universal Health Servs., Inc. v.
Thompson, 24 S.W.3d 574, 576 (Tex. App.—Austin 2000, no pet.); see also Tom James of Dallas,
Inc. v. Cobb, 109 S.W.3d 877, 884 (Tex. App.—Dallas 2003, no pet.). Viewing the evidence in the
light most favorable to the trial court’s order and indulging every reasonable inference in its favor,
7
we determine whether the order was so arbitrary as to exceed the bounds of reasonable discretion.
Universal Health Servs., 24 S.W.3d at 576; Tom James of Dallas, 109 S.W.3d at 883. If the court
heard conflicting evidence and the record contains evidence that reasonably supports its decision,
we will affirm the order. Universal Health Servs., 24 S.W.3d at 576; see also Davis v. Huey, 571
S.W.2d 859, 862 (Tex. 1978).
In an interlocutory appeal such as this, a trial court may file findings of fact and
conclusions of law, but it is not required to do so. Tex. R. App. P. 28.1; Tom James of Dallas, 109
S.W.3d at 884. While findings and conclusions may be helpful in reviewing for an abuse of
discretion, they do not carry the same weight as findings made after a trial on the merits and are not
binding when we are reviewing a trial court’s exercise of discretion. Tom James of Dallas, 109
S.W.3d at 884 (citing IKB Indus., Ltd. v. Pro-Line Corp., 938 S.W.2d 440, 442 (Tex. 1997);
Chrysler Corp. v. Blackmon, 841 S.W.2d 844, 852 (Tex. 1992)).
Standing
In its first issue, R & R Resources contends that Echelon, Tex-El, and BairTex lacked
standing to request the temporary injunction because they lack any direct ownership in the wells at
issue. R & R Resources quotes language in the joint operating agreements that permits removal of
the operator “by the affirmative vote of Non-Operators owning a majority interest.” But the
testimony at the temporary injunction hearing revealed that, although Echelon, Tex-El, and BairTex
sold portions of the working interests that they had purchased, they also reserved portions of those
oil and gas interests for themselves.
8
Additionally, Slayton and Bair testified that Echelon, Tex-El, and BairTex owned a
majority of the working interest in the wells through participation or subscription agreements with
their respective investors that had delegated decision-making and voting authority over their interests
to Echelon, Tex-El, and BairTex. Slayton testified that Tex-El and its investors own 20% of the
working interest in the Ullrich well and 15% of the working interest in the Goebel Brothers well.
The parties, including R & R Resources, stipulated to the testimony concerning BairTex’s and
Echelon’s interests in the wells.7 With regard to the Ullrich well, the parties stipulated to the
testimony that BairTex and its investors own 12.40% of the working interest while Echelon and its
investors own 36.20% of the working interest. The parties further stipulated to the testimony that,
with regard to the Goebel Brothers well, BairTex and its investors own 10% of the working interest
while Echelon and its investors own 37% of the working interest. The parties also stipulated to the
testimony that Echelon, Tex-El, and BairTex—along with their investors who purchased a portion
of the working interests—collectively owned 69% of the total working interest in the Ullrich well
and 62% of the total working interest in the Goebel Brothers well.
R & R Resources next contends that it had a statutory right to determine the identities
of Echelon’s, Tex-El’s, and BairTex’s investors and obtain their opinions on the lawsuit. See Tex.
Nat. Res. Code Ann. § 91.141(b) (West 2001). Its understanding of section 91.141 of the natural
resources code entitles “any stockholder, or shareholder, or royalty owner in an oil well” to inspect
the records of any owners and operators of oil and gas wells. But that section of the code states that
7
R & R Resources stipulated that these statements constituted a proffer of two witnesses’
testimony, but it did not stipulate to the numbers.
9
“[t]he books shall be kept open for inspection of the commission or any accredited representative
of the commission and any stockholder, shareholder, or royalty owner in the business.” Id.
(emphasis added). This statute requires Echelon, Tex-El, and BairTex each to keep its books open
for its own stockholders, shareholders, and royalty interest owners. R & R Resources does not cite
any authority for its contention that the books must be opened to “any stockholder, or shareholder,
or royalty owner in an oil well,” other than its interpretation of excerpts from section 91.141 of the
natural resources code. We do not find its argument under section 91.141 persuasive.
R & R Resources’s reliance on a contractual right to disclosure under the joint
operating agreements is similarly misplaced. It asserts that paragraph V.B.2 of the joint operating
agreements entitles it to determine whether Echelon, Tex-El, and BairTex conducted a valid vote or
polling of their investors prior to removal of the operator. Paragraph V.B.2 of the agreements states
that the successor operator shall be selected by the affirmative vote of two or more parties owning
a majority interest. As previously noted, there was testimony at the hearing that Echelon, Tex-El,
and BairTex owned a majority of the working interest in the wells through participation or
subscription agreements with their respective investors and that each of these agreements delegated
decision-making and voting authority over their interests to Echelon, Tex-El, and BairTex.
The trial court found that “Plaintiffs [Echelon, Tex-El, and BairTex] own or, by virtue
of written agreements with their respective investors, exclusively control (including all voting and
decision making rights) a majority of the working interest” in the Ullrich and Goebel Brothers leases.
The court further found that in April 2004, plaintiffs notified R & R Resources of their affirmative
vote to remove R & R Resources as operator of the three leases. Because there was some evidence
10
adduced at the hearing that Echelon, Tex-El, and BairTex have direct ownership in the Ullrich and
Goebel Brothers wells, that their interests combined with those of their investors constituted a
majority, and that they affirmatively voted to remove R & Resources as operator, we do not find that
the court abused its discretion in determining that Echelon, Tex-El, and BairTex had standing to
request a temporary injunction. We overrule R & R Resources’s first issue.
Probable, Imminent, and Irreparable Injury
In its second issue, R & R Resources argues that the trial court abused its discretion
in finding “irreparable injury” because Echelon, Tex-El, and BairTex did not establish that they
would sustain imminent, irreparable injury without the entry of a temporary injunction. R & R
Resources also argues that the Non-Operators have an adequate legal remedy in the form of a
contractual suit for damages. Probable injury includes elements of imminent harm, irreparable harm,
and lack of an adequate remedy at law for damages. Telephone Equip. Network, Inc. v.
TA/Westchase Place, Ltd., 80 S.W.3d 601, 607 (Tex. App.—Houston [1st Dist.] 2002, no pet.). An
injury is irreparable if the injured party cannot be adequately compensated in damages or if the
damages cannot be measured by any certain pecuniary standard. Butnaru, 84 S.W.3d at 204. An
adequate legal remedy is one that is as complete, practical, and efficient to the prompt administration
of justice as is equitable relief. Universal Health Servs., 24 S.W.3d at 577.
R & R Resources argues that the wells at issue have produced oil and gas in paying
quantities under its operatorship, that it has made proportional distributions of this income each
month, and that the audit of its financial records did not reveal any unpaid invoices, pollution, loss
11
of acreage, liens, or claims against the wells. But Echelon, Tex-El, and BairTex introduced evidence
that R & R Resources was billing them for expenses incurred at least two months earlier, or expenses
incurred in the same month as the billing, that their revenues were reduced by the amount of these
untimely billings, and that R & R Resources delayed paying the expenses for several months despite
its ability to pay them. There was evidence that the Goebel Brothers refund was not paid until
seventeen months after the well was drilled, $100,000 of the Goebel Brothers well expenses were
unpaid for ten months, revenue checks to some owners were dated weeks before they were mailed,
and the audit of R & R Resources raised questions about whether certain bills were paid at all.
Mark Jaehne of Leexus testified that, although he received checks for his override
interest from Doutel in three or four weeks from the time the check was “cut,” Doutel was further
behind because Doutel’s check represented payment for the preceding month’s production; it was
not an advance payment. Jaehne explained that if Tex-On, an oil and gas gatherer, typically wired
payment to Doutel on the 20th, but Doutel did not write a check to the interest owner until the 5th
of the next month and did not mail it until three or four weeks after the date on that check, the
interest owner would not be paid for production until sixty to seventy-five days after Doutel received
payment. Jaehne also testified that he had a conversation with Tex-On about being paid directly, but
Doutel would not allow Tex-On to make such direct payments.
Jaehne further testified that continual late payments may cause vendors to refuse to
extend credit, charge higher prices, or refuse to provide services. He testified that R & R
Resources’s operational charges were excessive; that the price it received from the sale of salvage
was too low; that it failed to install continuous chemical treating systems, the lack of which can
12
corrode equipment and affect production; and that it failed to adequately determine the need for
replacement materials and equipment. Additionally, Snider testified that Leexus could do a better
job, had more experience, more personnel, and a better location.
Slayton characterized Doutel’s demeanor as,“I’m going to do it the way I’m going
to do it and you can like it or dislike it.” Slayton also testified that an investor on the Ullrich and
Goebel Brothers wells resolved never to invest with Slayton again because the “operational bills
were too high,” and that vendors complained about the way their bills had been handled by R & R
Resources. Doutel testified that he was “not concerned about what vendors think.”
Ongoing and continuing harm resulting from an operator’s refusal to relinquish
operations is at least one basis for finding irreparable injury in support of a temporary injunction.
See Tri-Star Petroleum Co. v. Tipperary Corp., 101 S.W.3d 583, 591 (Tex. App.—El Paso 2003,
pet. denied). Moreover, Echelon, Tex-El, and BairTex made claims for cloud on title and injury to
real property, which do not require a showing that an adequate legal remedy is lacking to support an
award of injunctive relief. See Tex. Civ. Prac. & Rem. Code Ann. § 65.011(4)-(5) (West 1997). The
trial court’s order found that Echelon, Tex-El, and BairTex would suffer injury for which there was
no adequate remedy at law, noting that R & R Resources’s improper accounting and operational
practices
have caused and will continue to cause loss and/or delay of revenue; payment of
excessive and/or unnecessary lease/well expenses; late payment of lease/well
expenses; exposure to lease/well creditors for non or late payment; the loss,
interruption, and/or delay in production of valuable minerals; and the injury and/or
damage to the well bores and/or equipment and materials located on the leases/wells.
13
The trial court also determined that the above damages would continue to occur so long as R & R
Resources was operating the lease and that Echelon, Tex-El, and BairTex and their respective
investors lacked an adequate legal remedy absent the issuance of the temporary injunction. The trial
court was within its discretion to make such determinations based on the evidence before it.
Furthermore, the court could have issued the temporary injunction without finding a lack of adequate
legal remedy based on section 65.011 (4)-(5) of the Texas Civil Practice and Remedies Code. See
id.
R & R Resources also argues that, although the operations for the three wells at issue
have been conducted under the terms of the joint operating agreements for the Ullrich and Goebel
Brothers wells, the court granted a temporary injunction as to only two of the three wells. Although
the temporary injunction was inapplicable to the Toennis well, the record shows that, of the three
wells in the underlying suit, the Toennis is the only well that is not expressly covered by a joint
operating agreement. The court heard Benny Jaehne of Leexus testify that, because the Toennis does
not have any operating agreement, if R & R Resources did not want to pay another bill it “would not
be bound to anything.” The trial court’s findings state that, while the parties did not execute a joint
operating agreement for the Toennis lease, R & R Resources argued without objection that the terms
of the agreements for the Ullrich and Goebel Brothers leases applied to the Toennis lease by
implication. Indulging every reasonable inference in favor of the court’s order, we may infer that
the trial court declined to include the Toennis well within the temporary injunction because it is not
expressly covered by either of the two joint operating agreements. We overrule R & R Resources’s
second issue.
14
Probable Right to the Relief Sought
In its third issue, R & R Resources urges that the trial court abused its discretion in
finding a “probable right of recovery” because Echelon, Tex-El, and BairTex did not obtain a finding
of R & R Resources’s gross negligence, willful misconduct, material breach, or total inability to
perform. A probable right of success on the merits is shown by alleging a cause of action and
presenting evidence that tends to sustain it. Telephone Equip. Network, Inc., 80 S.W.3d at 607. The
temporary injunction applicant is not required to establish that it will prevail on final trial. Butnaru,
84 S.W.3d 198, 211.
The relevant provisions in the joint operating agreements are found in the first two
sections of article V.B.:
1. Resignation or Removal of Operator: Operator may resign at any time by giving
written notice thereof to Non-Operators. If Operator terminates its legal
existence, no longer owns an interest hereunder in the Contract Area, or is no
longer capable of serving as Operator, Operator shall be deemed to have
resigned without any action by Non-Operators, except the selection of a
successor. Operator may be removed only for good cause by the affirmative
vote of Non-Operators owning a majority interest based on ownership as shown
on Exhibit “A”8 remaining after excluding the voting interest of Operator; such
vote shall not be deemed effective until a written notice has been delivered to
the Operator by a Non-Operator detailing the alleged default and Operator has
failed to cure the default within thirty (30) days from its receipt of the notice or,
if the default concerns an operation then being conducted, within forty-eight (48)
hours of its receipt of the notice. For purposes hereof, “good cause” shall mean
8
The Non-Operators’ ownership percentages shown in Exhibit “A” reflect the amounts that
each owned before selling portions of their interests to investors. The parties stipulated to the
testimony concerning BairTex’s and Echelon’s interests in the wells, although R & R Resources did
not stipulate to the numbers.
15
not only gross negligence or willful misconduct but also the material breach of
or inability to perform its obligations under this agreement.
Subject to Article VII.D.1,9 such resignation or removal shall not become
effective until 7:00 o’clock A.M. on the first day of the calendar month
following the expiration of ninety (90) days after the giving of notice of
resignation by Operator or action by the Non-Operators to remove Operator,
unless a successor Operator has been selected and assumes the duties of
Operator at an earlier date. Operator, after effective date of resignation or
removal, shall be bound by the terms hereof as a Non-Operator. A change of a
corporate name or structure of Operator or transfer of Operator’s interest to any
single subsidiary, parent or successor corporation shall not be the basis for
removal of Operator.
2. Selection of Successor Operator: Upon the resignation or removal of Operator
under any provision of this agreement, a successor Operator shall be selected by
the parties. The successor Operator shall be selected from the parties owning
an interest in the Contract Area at the time such successor Operator is selected.
The successor Operator shall be selected by the affirmative vote of two (2) or
more parties owning a majority interest based on ownership as shown on Exhibit
“A”; provided, however, if an Operator which has been removed or is deemed
to have resigned fails to vote or votes only to succeed itself, the successor
Operator shall be selected by the affirmative vote of the party or parties owning
a majority interest based on ownership as shown on Exhibit “A” remaining after
excluding the voting interest of the Operator that was removed or resigned. The
former Operator shall promptly deliver to the successor Operator all records and
data relating to the operations conducted by the former Operator to the extent
such records and data are not already in the possession of the successor operator.
Any cost of obtaining or copying the former Operator’s records and data shall
be charged to the joint account.
The trial court found that Echelon, Tex-El, and BairTex had shown a probable right
of recovery because (i) Echelon, Tex-El, and BairTex—who were non-operators owning a majority
working interest under the joint operating agreements—affirmatively voted to remove R & R
9
Article VII.D.1 permits the appointment of a new Operator “effective immediately” under
certain circumstances. The parties do not contend that this provision is applicable to this case.
16
Resources as operator and to select Leexus as operator; (ii) R & R Resources’s improper accounting
and operation practices—which were a material breach of the standards of operation and/or inability
to meet the standards of operation and a material failure or inability to perform obligations under the
joint operating agreements—constituted “good cause” for its removal as operator; and (iii) R & R
Resources violated article V.B.1-2 of the joint operating agreements by refusing to relinquish its
operator status and transfer operations to Leexus after Leexus was selected and appointed as
successor operator of all the wells.
Echelon, Tex-El, and BairTex’s petition alleged that Leexus had a right to be the
successor operator based on a majority vote. The evidence included a letter that Echelon, Tex-El,
and BairTex’s counsel wrote to Doutel on April 30, 2004, advising that his clients had voted to
remove R & R Resources as operator for “good cause” pursuant to the joint operating agreements’
terms. The letter listed the ways in which R & R Resources had “failed and refused to act as a
reasonably prudent operator” and demanded that R & R Resources relinquish operation of the wells.
Doutel’s May 28 response letter denied the request to relinquish operation of the wells.
R & R Resources urges that the trial court should have applied a gross negligence
standard. But the first paragraph of article V.B. in the joint operating agreements clarifies that good
cause for an operator’s removal “shall mean not only gross negligence or willful misconduct but also
the material breach of or inability to perform its obligations under this agreement.” Furthermore,
R & R Resources does not cite any authority supporting application of an exculpatory clause that
concerns the manner in which an operator conducts drilling operations, as in article V.A. of these
joint operating agreements, to equitable claims that do not involve R & R Resources’s “liability” for
17
damages, or to claims for damages that are not based on drilling operations. See Abraxas Petroleum
Corp. v. Hornburg, 20 S.W.3d 741, 759 (Tex. App.—El Paso 2000, no pet.); see also Cone v.
Fagadau Energy Corp., 68 S.W.3d 147, 155 (Tex. App.—Eastland 2001, pet. denied).
R & R Resources’s alternative argument that the evidence in the record fails to
support its removal as operator for “failing or refusing to carry out its duties” is not persuasive.
Failure to make prompt adjustments to an operating account and improperly assessed
charges—similar to the allegations in this case—have been bases for finding that an operator
“failed or refused to carry out its duties,” which would support the entry of a temporary injunction.
See Tri-Star Petroleum Co., 101 S.W.3d at 589-90. Reviewing the evidence in the light most
favorable to the trial court’s order, we cannot conclude the trial court abused its discretion in finding
that Echelon, Tex-El, and BairTex established a probable right of recovery in support of their request
for temporary injunction. We overrule R & R Resources’s third issue.
Violations of Equity
In its final issue, R & R Resources claims that the trial court’s temporary injunction
violated the rules of equity because Echelon, Tex-El, and BairTex materially breached the notice and
removal provisions of the joint operating agreements and thus did not have “clean hands” when they
sought equitable relief. The evidence adduced at the hearing does not support this contention. On
April 30, 2004, Echelon, Tex-El, and BairTex gave R & R Resources formal notice of the ways in
which it had “failed and refused to act as a reasonably prudent operator.” Doutel’s May 28 response
letter did not address the majority of the other allegations in counsel’s letter. Almost four months
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after sending its demand letter, the Non-Operators requested the assistance of the Texas Railroad
Commission via single-signature P-4s. That request was denied on November 19, 2004. The Non-
Operators did not seek an injunction against R & R Resources until May 18, 2005, when they filed
suit. R & R Resources’s argument that it did not have thirty days to cure the Non-Operators’
complaints is not persuasive. Similarly, its arguments that it did not have written notice of the
accounting discrepancies or receive a copy of the audit prior to the lawsuit are not persuasive because
they are not prerequisites to filing suit under the terms of the joint operating agreements.
R & R Resources’s final argument is that the trial court’s temporary injunction
violated the rules of equity because the temporary relief requested was identical to the permanent
relief requested. It claims that the Non-Operators’ temporary injunction effectively accomplished
the entire purpose of their lawsuit and made the court’s order a ruling on the merits of whether
R & R Resources should be removed as operator. A ruling on temporary injunctive relief may not
be used to obtain an advance ruling on the merits. See Iranian Muslim Org. v. City of San Antonio,
615 S.W.2d 202, 208 (Tex. 1981). But Echelon, Tex-El, and BairTex did not receive all the relief
requested in their motion for temporary injunction or in their petition. The temporary injunction
does not cover the Toennis well. Additionally, the petition makes claims for damages based on
breach of contract and cloud on the title. Thus, the trial court did not grant relief identical to that
which the Non-Operators sought in their lawsuit by issuing the temporary injunction concerning the
Ullrich and Goebel Brothers wells. We overrule R & R Resources’s fourth issue.
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Opportunity to be Heard at Subsequent Status Hearing
In its fifth issue, R & R Resources urges that it was denied an opportunity to be heard
at a subsequent status hearing on September 5, 2005. R & R Resources argues that it should have
been able to present additional evidence on the issues of authority and irreparable injury. The court
had previously scheduled the status hearing to determine whether its temporary injunction order was
being followed, not as a continuation of the two-day temporary injunction hearing held in June. We
have found that the court had some evidence to support its findings on the issue of authority—as
noted in the earlier discussion of the Non-Operators’ standing to seek the temporary injunction—and
irreparable injury. We also note that the court agreed to conduct an in camera inspection on
November 4, 2005, to address the issue of Echelon, Tex-El, and BairTex’s authority, thus R & R
Resources had an additional opportunity to raise this issue with the trial court. We overrule R & R
Resources’s fifth issue.
Impermissibly Speculative Order
R & R Resources’s sixth issue argues that the trial court’s order was impermissibly
speculative because it did not make findings of gross negligence or willful misconduct on the part
of R & R Resources and that its findings on irreparable injury are not supported by the evidence.
We previously noted that article V.B.1 in these joint operating agreements states that “good cause”
for an operator’s removal includes the operator’s “material breach of or inability to perform its
obligations under th[e] agreement[s]” and found that the trial court had some evidence to support
its finding that R & R Resources “failed or refused to carry out its duties” to support the entry of a
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temporary injunction. We also found that ongoing and continuing harm resulting from an operator’s
refusal to relinquish operations is at least one basis for finding irreparable injury in support of a
temporary injunction. We overrule R & R Resources’s sixth issue.
CONCLUSION
Based on the record before us, R & R Resources has not shown that the district court
acted outside the bounds of reasonable discretion by granting the temporary injunction. Accordingly,
we affirm the court’s order.
__________________________________________
Jan P. Patterson, Justice
Before Justices B. A. Smith, Patterson and Puryear
Affirmed
Filed: January 10, 2006
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