Capital Risk Management Corporation v. Pampell Interests, Inc. ( 1993 )

PAMPELL IN THE COURT OF APPEALS, THIRD DISTRICT OF TEXAS,

AT AUSTIN





NO. 3-92-121-CV



CAPITAL RISK MANAGEMENT CORPORATION,

APPELLANT

vs.



PAMPELL INTERESTS, INC., COUNTY MANAGEMENT, INC., ZEAL ENERGY CORPORATION, AND ALFRED E. PAMPELL,

APPELLEES

FROM THE DISTRICT COURT OF FAYETTE COUNTY, 155TH JUDICIAL DISTRICT

NO. 91-031, HONORABLE DAN R. BECK, JUDGE PRESIDING

Capital Risk Management Corporation (hereinafter "Capital Risk") appeals from an adverse judgment rendered in a declaratory-judgment action it brought against Pampell Interests, Inc., County Management, Inc., Zeal Energy Corporation, and Alfred E. Pampell, individually (hereinafter collectively "CMI"). CMI brings cross-points attacking the judgment as well. We will affirm the judgment of the trial court.

THE CONTROVERSY

A.  Background

On April 4, 1985, Endrex Exploration Co. (hereinafter "Endrex") and County Management, Inc. ⁽¹⁾ entered into an amended farmout agreement (hereinafter "Agreement"). Under the terms of the Agreement, CMI granted Endrex the right to drill wells on its lease. The Agreement defined the parties' rights with regard to "project payout." Endrex would be able to recoup its costs in drilling and operating the wells. When the costs were recouped, CMI would have the option of "backing in" to a one-third ownership of the working interest. Under the Agreement, any credit or refund received by Endrex would reduce the drilling and operating costs. ⁽²⁾ The Agreement also provided that all debts incurred by Endrex in drilling and operating the wells under the Agreement would be paid within ninety days.

Pursuant to the Agreement, Endrex drilled the wells referred to in the Agreement as the Package 4 Wells. In the process of drilling and operating the wells, Endrex incurred at least $4,231,791.03 in debts to Halliburton Company and Otis Engineering Corporation (hereinafter "Halliburton and Otis").

On March 27, 1986, Endrex filed for Chapter 11 bankruptcy. The bankruptcy court conducted an adversary proceeding concerning the enforceability of the Agreement. The bankruptcy judge ruled that the Agreement was an enforceable contract between CMI and Endrex and that it controlled the rights and obligations of the parties. The amended final judgment from the bankruptcy proceeding held that Halliburton and Otis were owed valid debts of $4,231,791.03 incurred by Endrex in connection with the Package 4 Wells.

Endrex submitted its plan of reorganization on May 12, 1989. At that time, Endrex offered the Package 4 Wells for sale to the highest bidder. The plan of reorganization was approved by the bankruptcy judge on August 5, 1989. Pursuant to the judge's order, the Package 4 Wells were transferred from the Endrex bankruptcy estate to the Endrex Secured Creditors' Trust A.

Capital Risk became interested in purchasing the Package 4 Wells in September 1989. Capital Risk reviewed title opinions, testimony at the adversary proceeding, and the report by the auditor appointed by the bankruptcy court, all of which indicated that the Package 4 Wells would never reach payout. ⁽³⁾ After this review, Capital Risk made a bid on the wells in January 1990. The trustee of Secured Creditors' Trust A accepted this bid. A purchase and sale agreement between the trustee and Capital Risk was executed on February 20, 1990. On March 9, 1990, Secured Creditors' Trust A filed with the bankruptcy court a motion to sell the Package 4 Wells free and clear of liens, claims, and encumbrances for the contract price of $925,000. The bankruptcy court held a hearing on the motion on April 13, 1990, and signed an order approving the sale on May 3, 1990. Thus, on May 3, 1990, Capital Risk acquired all of the interest of Endrex in the Package 4 Wells. As a result of the sale, Halliburton and Otis voluntarily accepted this partial payment in full satisfaction of their claims of over four million dollars.

Thereafter, CMI informed Capital Risk by letter dated May 23, 1990, that it was taking the position that "project payout" under the terms of the Agreement had occurred and that it was exercising its option to acquire a one-third "back-in" ownership interest in the Package 4 Wells. CMI then notified purchasers of oil and gas from the Package 4 Wells of its asserted one-third interest in the proceeds and requested that these purchasers hold back sufficient revenues to pay CMI one-third of the proceeds.

B.  Procedural History

Capital Risk filed suit seeking a declaratory judgment regarding the payout provisions of the Agreement. It contended that the provisions were unambiguous and that payout would occur when, as a successor-in-interest to Endrex, it had recouped all of the drilling and operating costs paid or incurred by Endrex from the net revenues received from the sale of oil and gas. In the alternative, Capital Risk claimed that CMI was barred from asserting a contrary position by the doctrines of res judicata, collateral estoppel, equitable estoppel, and waiver.

CMI, on the other hand, took the position that the payout provision in the Agreement meant that only those costs actually paid by Endrex, or those for which there was

a legal liability for payment, could be recouped. This meant that when the remaining debts were discharged by the bankruptcy court, payout occurred and CMI was entitled to its back-in ownership interest at that moment.

The trial in this cause took place in several hearings before the court. A hearing on the meaning of the payout provisions was held on April 29, 1991, ⁽⁴⁾ and a hearing on the alternative arguments made by Capital Risk was held on January 23, 1992. On May 29, 1991, the trial court issued a letter opinion to the parties regarding its decision on the meaning of payout. ⁽⁵⁾ Final judgment was rendered on January 23, 1992.

In its final judgment, the trial court held that Capital Risk was entitled to recover its costs of buying the Package 4 Wells from Secured Creditors' Trust A including: "(i) the acquisition costs, (ii) the acquisition purchase price, (iii) attorney's and other professional fees and expenses incurred in connection with the present controversy by Capital Risk, (iv) Phillips' attorney's fees in the amount of $4,500.00, and (v) Koch's attorney's fees in the amount of $10,000.00 (Phillips and Koch are to assume the balance of whatever attorney's fees are incurred)." ⁽⁶⁾ The judgment recited that the amount of recoverable costs actually expended by Capital Risk as of August 31, 1991, was $1,408,149.73, of which only $216,488.94 remained unrecouped at that date. The judgment further recited that when the remaining $216,488.94 was recouped, payout would occur and CMI would be entitled to a one-third working interest in the wells.

C.  Contentions on Appeal

Capital Risk appeals this judgment. In its first point of error, it contends that the trial court erred in not filing findings of fact and conclusions of law. Capital Risk next contends that the trial court erred in its construction of the contract. In its final two points of error, Capital Risk contends that CMI is barred by res judicata, collateral estoppel, and equitable estoppel from asserting its position regarding construction of the contract.

CMI contends by cross-point that the trial court had no basis for allowing Capital Risk to recoup its acquisition costs including its attorney's fees. CMI also contends by cross-point that the trial court erred in not finding that payout occurred at the time that the interest was sold free and clear of all encumbrances to Capital Risk by Secured Creditors' Trust A. In its final two cross-points, CMI contends that Capital Risk breached the Agreement and seeks recovery of CMI's attorney's fees.

DISCUSSION

A.  Lack of Findings of Fact and Conclusions of Law

Capital Risk's first point of error complains of the failure by the trial court to make findings of fact and conclusions of law. The company asserts in its brief that "Capital Risk timely filed a request for findings of fact and conclusions of law and the notice of past due findings." Tex. R. Civ. P. 296, 297. A review of the transcript reveals that both parties made timely requests for findings under rule 296, but that neither party ever filed a notice of past due findings as is required by rule 297. Capital Risk's failure to follow the requirements of rule 297 results in a waiver of its complaint that the trial court erred in not filing findings of fact and conclusions of law. Las Vegas Pecan & Cattle Co. v. Zavala County, 682 S.W.2d 254, 255-56 (Tex. 1984). Accordingly, we overrule Capital Risk's first point of error.

As a result of the above waiver, this appeal is from a bench trial in which there are no findings of fact or conclusions of law. Thus, we must affirm the judgment of the trial court if it can be upheld on any legal theory that finds support in the evidence. In re W.E.R., 669 S.W.2d 716, 717 (Tex. 1984). "[I]n the absence of findings and conclusions, the judgment of the trial court implies all necessary fact findings in support of the judgment." Id.; Buchanan v. Byrd, 519 S.W.2d 841, 842 (Tex. 1975).

B.  Construction of the Contract

Capital Risk's second point of error contends that the trial court erred in construing the payout provisions of the Agreement, because it failed to apply basic contract construction principles and because it rewrote the contract instead of construing it as written.

Both CMI and Capital Risk agree that the central question in this appeal is the proper legal construction of the language of the Agreement related to the cost side of payout. More specifically, this Court is called upon to determine the proper construction of the words "paid or incurred." Both parties also agree that the contract is unambiguous and that we are to give effect to the objective intent of the parties as expressed in the contract. See Westwind Exploration, Inc. v. Homestate Sav. Ass'n, 696 S.W.2d 378, 382 (Tex. 1985).

In construing a contract, the goal of the court is to give effect to the intention of the parties. Jim Walter Homes, Inc. v. Scheunemann, 668 S.W.2d 324, 330 (Tex. 1984). The language in the contract should be given its plain grammatical meaning unless it definitely appears that the intention of the parties would thereby be defeated. Reilly v. Rangers Management, Inc., 727 S.W.2d 527, 529 (Tex. 1987). The court should examine and consider the whole contract in its effort to determine the intent of the parties. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). The question is not what the parties meant to say, but the meaning of what they did say by the use of the words contained in the agreement. See State Nat'l Bank v. Morgan, 143 S.W.2d 757 (Tex. 1940).

In the Agreement, "payout" is defined on a well-by-well basis as the point when net proceeds from the sale of oil and gas of the well equal the total cost of the well. "Total cost" is further defined, in part, as the sum of operating costs and drilling costs. The Agreement states that the operating costs included in total cost are those "paid or incurred by Endrex prior to the date of payout." (Emphasis added). Drilling costs include those "paid or incurred by Endrex for drilling, testing, completing and equipping such well for production." (Emphasis added).

Capital Risk asserts that the plain grammatical meaning of the phrase "paid or incurred" was ignored by the trial court and must be given effect by this Court. Capital Risk contends that Endrex incurred all of these costs prior to bankruptcy, and Capital Risk must be allowed to recoup the full amount of the incurred costs before payout will occur under the terms of the Agreement. Capital Risk insists that since Endrex was actually liable for these debts prior to bankruptcy, all of the costs were "incurred" within the meaning of the contract, regardless of what later happened to the corresponding liability of Endrex.

On the other hand, in its first two cross-points, CMI asserts that the bankruptcy court's order effectively resulted in a discharge of all costs incurred by Endrex that remained unpaid. CMI contends that when the bankruptcy discharge occurred, payout was achieved and CMI was immediately entitled to its one-third ownership interest under the Agreement.

Both parties, to some extent, argue that the trial court has rewritten rather than construed the contract for the parties. We disagree. The crux of this contract dispute concerns the interpretation of the term "incurred costs" contained in the payout provisions. The goal of the trial court in interpreting a written contract is to discern the actual intent of the parties as expressed in the contract. Reilly, 727 S.W.2d at 529; Coker, 650 S.W.2d at 393. "Courts will avoid when possible and proper a [contract] construction which is unreasonable, inequitable, and oppressive." Reilly, 727 S.W.2d at 530. The record indicates that the trial judge partially rejected the extreme positions taken by both parties. For example, it is obvious that the trial court refused to hold, as Capital Risk contends, that the parties contemplated that the term "incurred costs" contained in the payout provision did not require a corresponding liability. To construe the contract otherwise would allow one party to the Agreement to incur unreasonable expenses with the understanding that they would never have to actually be paid. This would mean, in effect, that one party could deprive the other of the right to ever "back-in" to an ownership interest. On the opposite end of the spectrum, the trial court refused to give CMI a windfall because the creditors in the bankruptcy gave a full release of liens, without considering the sale price and acquisition costs of the resulting transfer and release.

In the final analysis, the trial court has interpreted the term "incurred costs" pursuant to the Agreement to equal the sales price plus acquisition costs and attorney's fees and established this sum for recoupment by Capital Risk before payout to CMI would occur. It appears to us that, rather than rewrite the contract for the parties, the trial court has interpreted the legal meaning of "incurred costs" within the context of the entire Agreement. ⁽⁷⁾ We conclude that this interpretation by the trial court was not unreasonable and avoids inequity or oppression to either party. We, therefore, overrule Capital Risk's second point of error and CMI's first two cross-points of error. Because of our disposition of CMI's first two cross-points, we do not reach its remaining two cross-points.

C.  Res Judicata and Collateral Estoppel

In its third point of error, Capital Risk asserts that the trial court erred in not ruling that CMI was barred by res judicata and collateral estoppel from asserting its construction of "project payout." Capital Risk bases its argument on the judgment in the bankruptcy adversary proceeding. It claims that since the Agreement was the subject matter in the bankruptcy proceeding, CMI could have, and should have, asked the bankruptcy court to construe the payout provisions in the Agreement.

Because the earlier judgment was rendered in federal court, we will apply substantive federal law concerning res judicata and collateral estoppel. Hayes v. Pin Oak Petroleum, Inc., 798 S.W.2d 668, 671 (Tex. App.--Austin 1990, writ denied). Res judicata, or claim preclusion, bars a party from bringing another action on claims actually litigated or claims that could have been litigated. Jeanes v. Henderson, 688 S.W.2d 100, 103 (Tex. 1985). The prior judgment operates as an absolute bar to retrial of claims relating to the same cause of action between the same parties or those in privity with them, involving the same issues, subject matter, and relief. Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 816, 818 (Tex. 1984). The elements of the federal doctrine of res judicata include: "(1) identical parties in both suits; (2) prior judgments rendered by a court of competent jurisdiction; (3) a final judgment on the merits; and (4) the same cause of action involved in both cases." Hayes, 798 S.W.2d at 672. The federal doctrine of collateral estoppel, or issue preclusion, provides that "once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action . . . ." Id. at 671.

For the purposes of our discussion, we will assume that Capital Risk, as a successor to Endrex, was a party to the prior bankruptcy proceeding. CMI also participated in that proceeding. Thus, if the payout provisions in the Agreement had been construed by the bankruptcy court in the context of the sale of the Package 4 Wells free and clear from encumbrances, then that judgment would bar the current action. However, that issue was not addressed by the bankruptcy court, and indeed could not have been so addressed. At the time of the bankruptcy proceeding, the Package 4 Wells were an asset of Endrex. They had not yet been sold free and clear of encumbrances. Any decision regarding the status of "project payout" would have been advisory at that point. We, therefore, overrule Capital Risk's third point of error.

D.  Equitable Estoppel

With its final point of error, Capital Risk contends that the trial court erred in not holding that CMI was equitably estopped from asserting its construction of the payout provisions in the contract. Capital Risk argues that CMI planned to assert that payout occurred upon a sale from the bankruptcy court prior to the sale. Capital Risk further argues that CMI did not fully inform potential buyers of its belief that payout would occur upon a sale of the Package 4 Wells free from liens and encumbrances, even after undertaking a duty of disclosure.

Estoppel is a rule of equity applied to prevent a person from taking advantage of a situation when, with knowledge of relevant facts, the person induces or allows another person to worsen its position. Koelzer v. Pizzirani, 718 S.W.2d 420, 423 (Tex. App.--Fort Worth 1986, no writ). Equitable estoppel prevents a party from asserting an otherwise valid right when that party: (1) makes a false representation or conceals material facts; (2) with knowledge, actual or constructive, of the facts; (3) to a party without knowledge or means of knowledge of the real facts; (4) with the intention that it should have been acted upon; and (5) the party to whom it was made has relied upon or acted upon the representation or concealment to its prejudice. Gulbenkian v. Penn, 252 S.W.2d 929, 932 (Tex. 1952). "The granting or denial of equitable relief lies within the sound discretion of the trial court . . . . [A] challenge of the trial court's refusal to grant . . . equitable relief . . . must be founded on a clear abuse of discretion on the part of the trial judge." Mathews v. First Citizens Bank, 374 S.W.2d 794, 797 (Tex. Civ. App.--Dallas 1963, writ ref'd n.r.e.); cf. Fleetwood v. Med Ctr. Bank, 786 S.W.2d 550, 556-57 (Tex. App.--Austin 1990, writ denied).

As in Mathews, we do not find it necessary or desirable to review the circumstances under which Capital Risk's alleged claim of equitable estoppel might arise. It is enough to say that the evidence in this record is in conflict. It is unclear whether CMI actually undertook a duty of "full disclosure," and in fact there is some evidence that the president of Capital Risk believed that CMI owed no such duty. There is certainly not enough evidence in the record to indicate that the trial court abused its discretion in its implied finding that CMI was not equitably estopped from asserting its construction of the payout provisions. We, therefore, overrule Capital Risk's fourth and final point of error.

CONCLUSION

For the reasons stated above, we affirm the judgment of the trial court.

Mack Kidd, Justice

[Before Justices Powers, Kidd and B. A. Smith]

Affirmed

Filed: June 30, 1993

[Do Not Publish]

1.   The relationship between County Management Inc., Pampell Interests, Inc., Zeal Energy Corp., and Alfred E. Pampell, individually, is unclear. It is apparent from the record that interests belonging to County Management, Inc. are coextensive with those of Alfred E. Pampell.

2.   For example, any credit or refund that Endrex received for payment of excess windfall profit taxes "shall be applied to reduce the taxes actually paid in determining payout."

3.   There were insufficient oil reserves to generate the proceeds needed to pay over four million dollars in outstanding debts.

4.   This Court does not have the statement of facts from this hearing because the court reporter lost his notes.

5.   This letter opinion is not a substitute for findings of fact and conclusions of law, which were not filed in this case. We are not entitled to look to comments contained within this letter as such a substitute. See In re of W.E.R., 669 S.W.2d 716 (Tex. 1984). The letter, however, provides insight into the reasoning the trial court used in reaching its judgment.

6.   Koch Oil & Gas Company and Phillips 66 Natural Gas Company were the first purchasers of oil and gas from the Package 4 Wells.

7.   We note, for example, that other portions of the Agreement provide that any credits, discounts, or refunds received by Endrex would inure to the benefit of CMI and would correspondingly reduce "incurred costs."