Bandera Drilling Co., Inc. and Rayburn L. Brazzel v. Sledge Drilling Corp.

Opinion filed August 6, 2009
In The
Eleventh Court of Appeals
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No. 11-08-00284-CV
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BANDERA DRILLING CO., INC. AND RAYBURN L. BRAZZEL,
Appellants
V.
SLEDGE DRILLING CORP., Appellee
On Appeal from the 385th District Court
Midland County, Texas
Trial Court Cause No. CV46357
OPINION
This is a dispute over the enforceability of a covenant not to compete. The trial court
reformed the covenant by reducing the covered territory, found that the reformed covenant was
enforceable, and granted injunctive relief. We reverse and remand.
I. Background Facts
In 2005, David W. Sledge and Spencer Armour were working for a large drilling company
but were interested in operating their own company. Sledge ran into Rayburn L. Brazzel at a
convenience store. Brazzel owned a drilling company, Bandera Drilling Co., Inc. Their encounter
led to a conversation about Sledge and Armour acquiring Bandera Drilling’s rigs. The parties signed
a letter of intent on October 21, 2005. They ultimately met on a Saturday morning in February 2006
at Brazzel’s office in Abilene and worked out the terms of an agreement themselves.
The parties labeled their agreement “BANDERA DRILLING COMPANY, INC. SIX
DRILLING RIGS AND THREE PIECES OF EQUIPMENT PURCHASE AGREEMENT.” The
agreement defined Bandera Drilling Company, Inc. d/b/a Bandera Supply Company as the seller.
Bandera Supply was originally incorporated as a separate entity; however, because of tax law
changes, Brazzel began operating it as a dba of Bandera Drilling instead, although he continued to
maintain separate books for the two companies.
The agreement conveyed six drilling rigs, a mud pump, a rotary table, and a swivel to Sledge
Drilling for $34,000,000: $33,950,000 was payable to Bandera Drilling, and the remaining $50,000
to Brazzel. As part of the agreement, Bandera Drilling and Brazzel agreed not to compete with
Sledge Drilling by engaging in the oil or gas well contract drilling business “West of the North/South
line drawn through the Colorado City, Texas courthouse” for five years.
Brazzel signed the agreement individually and on behalf of Bandera Drilling. Brazzel and
his wife executed written consents to the agreement as both shareholders and directors of Bandera
Drilling. Brazzel also signed an assignment and bill of sale on behalf of Bandera Drilling in which
he conveyed “all of the rights, title and interest, tangible and intangible” that Bandera Drilling had
in the six rigs and three pieces of equipment.
The agreement’s structure provided tax benefits for both parties. Sledge Drilling was
responsible for any sales taxes. A Sledge Drilling representative met with the Texas Comptroller’s
office and acquired a Texas Direct Payment Sales Tax Permit based upon the fact that it was
acquiring an identifiable segment of Brazzel’s business. Because of this, no sales tax was owed on
the transaction. Bandera Drilling received potential federal income tax benefits. Brazzel’s goal was
to do a like-kind exchange to avoid recapturing depreciation by having Bandera Supply sell the old
rigs, buy new rigs, and then trade them to Bandera Drilling.
Bandera Drilling’s employees were introduced to Sledge and Armour as the new owners.
The rig hands went to work for Sledge Drilling, and Bandera Drilling transferred at least a portion
of their employment files so that they could obtain health insurance. Bandera Drilling retained
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approximately forty employees. Some of these were working for Bandera’s trucking company, some
for the supply company, and the rest for Bandera Drilling. Bandera Drilling’s salesman, David
Gober, introduced Sledge and Armour to Bandera Drilling’s customers.
Brazzel sold his rigs so that he could purchase updated rigs. He had been working with
National Supply to purchase an electric rig. His intent was to drill wells in Palo Pinto County and
Stephens County and to work the Barnett Shale near Fort Worth. The price of the electric rig
eventually became too expensive, and he decided to build new rigs instead. He completed his first
rig and had it in service in Palo Pinto County or Stephens County in July 2006. In late 2006, Basic
Energy contacted Armour. Basic wanted to purchase some drilling rigs. This discussion led to an
agreement whereby Basic acquired Sledge Drilling on April 2, 2007.
Brazzel contacted Sledge after the Basic acquisition and unsuccessfully attempted to sell him
another rig. Brazzel made other efforts to sell the rig, but he had only one offer – for approximately
one-half of what he was seeking, and he elected to put it in service instead in the protected area.
Brazzel notified Sledge in December 2007 that he had decided to test the noncompete provision by
going back to work in West Texas. Brazzel justified this by contending that Sledge and Armour had
orally promised to run their company as a small independent and that their sale to Basic violated this
promise. Despite his professed concern for small operators, Brazzel then drilled ten wells for XTO
Energy – an NYSE-listed company. Brazzel also claimed that Sledge Drilling promised to drill three
wells a year for Mr. Voskamp, Armour’s neighbor and the operator of some wells in which Brazzel
was an investor, but that it did not do so. In 2006, Voskamp approached Armour about drilling a
well. Sledge Drilling’s rigs were committed to long-term contracts, but they had a window for one
rig. That window did not fit Voskamp’s schedule.
Sledge Drilling filed suit to enforce the covenant not to compete. The parties filed competing
motions for summary judgment. The trial court reformed the covenant by limiting it to Texas and
New Mexico and granted partial summary judgment in favor of Sledge Drilling. Subsequently, the
parties reached a partial settlement agreement. Without conceding the covenant’s enforceability,
they agreed that Sledge Drilling was entitled to an injunction through March 10, 2011, if it was
enforceable. Both parties nonsuited with prejudice all requests for relief except for Bandera Drilling
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and Brazzel’s request for a declaratory judgment on the covenant’s validity. The trial court entered
a final judgment consistent with this agreement and its prior partial summary judgment.
II. Issues
Bandera Drilling and Brazzel challenge the judgment with two issues. They argue first that
the trial court erred by finding the covenant enforceable and second that the trial court erred by not
striking inadmissible affidavit testimony.
III. Analysis
A. Standard of Review.
We review a summary judgment de novo. Provident Life & Accident Ins. Co. v. Knott, 128
S.W.3d 211, 215 (Tex. 2003). We review the evidence presented in the motion and response in the
light most favorable to the party against whom the summary judgment was rendered, crediting
evidence favorable to that party if reasonable jurors could and disregarding contrary evidence unless
reasonable jurors could not. City of Keller v. Wilson, 168 S.W.3d 802, 827 (Tex. 2005). When both
sides move for summary judgment and the trial court grants one motion and denies the other, we
review the summary judgment evidence presented by both sides and determine all questions
presented. Comm’rs Court of Titus County v. Agan, 940 S.W.2d 77, 81 (Tex. 1997). In this
instance, we render the judgment the trial court should have rendered. Id.
When, as here, we are required to interpret a written agreement, our primary concern is to
ascertain the true intentions of the parties as expressed in the instrument. R & P Enters. v. LaGuarta,
Gavrel & Kirk, Inc., 596 S.W.2d 517, 518 (Tex. 1980). We examine and consider the entire writing
in an effort to harmonize and give effect to all the provisions of the contract so that none will be
rendered meaningless. Universal C.I.T. Credit Corp. v. Daniel, 243 S.W.2d 154, 158 (Tex. 1951).
No single provision taken alone will be given controlling effect. All the provisions must be
considered with reference to the whole instrument. Myers v. Gulf Coast Minerals Mgmt. Corp., 361
S.W.2d 193, 196 (Tex. 1962). The contracts are construed from a utilitarian standpoint, bearing in
mind the particular business activity sought to be served. Reilly v. Rangers Mgmt., Inc., 727 S.W.2d
527, 530 (Tex. 1987).
B. Is the Covenant Not to Compete Enforceable?
Texas common law has traditionally been hostile to restraints of trade such as covenants not
to compete, but the Covenant Not to Compete Act provides:
[A] covenant not to compete is enforceable if it is ancillary to or part of an otherwise
enforceable agreement at the time the agreement is made to the extent that it contains
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limitations as to time, geographical area, and scope of activity to be restrained that
are reasonable and do not impose a greater restraint than is necessary to protect the
goodwill or other business interest of the promisee.
TEX . BUS. & COM . CODE ANN . § 15.50(a) (Vernon 2002). Brazzel argues that his covenant does not
satisfy this test and is, therefore, unenforceable because the purchase agreement lacks “any interest
worthy of protection.” Sledge Drilling responds that the covenant is enforceable because the
agreement transferred protectable intangible rights – as reflected by the employee and customer
introductions and the transfer of employee files.
Both parties have extensively described the negotiations leading up to the contract, including
prior versions of the agreement and the oral promises each allegedly made the other. We cannot
consider this extrinsic evidence. Neither party contends that the agreement is ambiguous or is not
fully integrated, and the contract contains a merger clause.1 When a contract contains a merger or
integration clause, the contract’s execution presumes that all prior negotiations and agreements
relating to the transaction have been merged into the contract, and it will be enforced as written and
cannot be added to, varied, or contradicted by parol evidence. ISG State Operations, Inc. v. Nat’l
Heritage Ins. Co., 234 S.W.3d 711, 719 (Tex. App.—Eastland 2007, pet. denied). During oral
argument, Brazzel correctly pointed out that courts can properly consider parol evidence of the
surrounding circumstances when interpreting a contract. See Avnsoe v. Square 67 Dev. Corp., 521
S.W.2d 874, 876 (Tex. Civ. App.—Eastland 1975, no writ). Courts have, for example, considered
the circumstances leading to the execution of an agreement. See, e.g., Columbia Gas Transmission
Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587 (Tex. 1996) (interpreting contract’s pricing provision
in light of the parties’ knowledge of impending deregulation and their uncertainty about the impact
this would have on gas prices). But when the parties utilize a merger provision, the substance of any
pre-execution negotiations, including the text of any prior drafts, is not a permissible consideration
absent pleading and proof of an ambiguity, fraud, or accident. ISG State Operations, 234 S.W.3d
at 719-20. Because that situation is not present, we cannot consider the parties’ negotiations –
including any prior drafts or oral promises.
1
That clause reads:
This Agreement represents the entire agreement of the Parties and supersedes all prior written or oral
agreements. The terms are contractual and not mere recitals.
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Courts must consider two questions when determining the enforceability of a covenant not
to compete: (1) is there an otherwise enforceable agreement and (2) was the covenant not to compete
ancillary to or part of that agreement at the time the otherwise enforceable agreement was made.
Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642, 644 (Tex. 1994). The first question is easily
resolved because the purchase agreement is an otherwise enforceable agreement. The second
question, however, is more difficult because of the divergence between the parties’ actions and the
express terms of their agreement. Specifically, the agreement contains no reference to business
goodwill; however, goodwill was unquestionably transferred.
Brazzel characterizes the purchase agreement as “the naked purchase of rigs and equipment.”
The agreement does convey title to six rigs and three pieces of equipment, but Brazzel’s
characterization fails to explain the presence of the noncompete provision or the $50,000 payment
to Brazzel individually and, more significantly, Bandera Drilling’s post-execution actions. Bandera
Drilling introduced Sledge and Armour to its employees as the new owners and gave Sledge Drilling
at least some information from their personnel files. The parties have offered conflicting
descriptions and explanations of what was done and why. Sledge Drilling contends that the
employees were an essential component of the transaction because the rigs could not have been
manned without them and that Brazzel transferred all of their employee files. Brazzel asserts that
he only transferred the information that was necessary for the employees to obtain insurance and that
he was trying to help them secure employment with Sledge Drilling because it would take time to
get his new rigs working. Because we are reviewing competing summary judgment motions, we
must consider the evidence in the light most favorable to Brazzel and Bandera Drilling. See City of
Keller, 168 S.W.3d at 827. This requires that we assume that their actions were done strictly for the
employees’ benefit and not as part of the transaction.
The customer introductions cannot be similarly discounted. There is no dispute that Bandera
Drilling’s salesman, Gober, introduced Sledge and Armour to its customers. Brazzel argues that this
is immaterial because Sledge and Armour already knew Bandera Drilling’s customers and because
this information is publicly available. Brazzel’s explanation ignores the practical significance of
Gober’s introductions. There is a critical distinction between having a list of Bandera Drilling’s
customers and being personally introduced to them by Gober. Drilling is a personal services
business, and relationships and trust are paramount. Gober’s introductions were an endorsement of
Sledge and Armour. Even if Sledge and Armour had already met or knew Bandera Drilling’s
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customers, that endorsement had value. Furthermore, it cannot be explained away as a mere
accommodation. These introductions undercut Bandera Drilling’s future competitiveness in West
Texas because they encouraged customers to transition to another drilling company.
Brazzel’s characterization of the purchase agreement also fails to account for the shareholder
and director consents that Brazzel and his wife signed2 and the Texas Comptroller’s determination
that no sales tax was due because of the Occasional Sales Rule. Under this rule, the sale of a
business or an identifiable segment of a business is exempt from sales tax. 34 TEX . ADMIN . CODE
§ 3.316(d) (2002) (Tex. Comptroller of Public Accounts, Sale of a business or an identifiable
segment of a business). For the rule to apply, the entire operating assets of the business or an
identifiable segment of the business must be sold in a single transaction to a single purchaser. Id.
Brazzel makes much of the fact that the sale was funneled through Bandera Supply. Sledge Drilling
responds that this is of no moment because Bandera Supply’s assumed name certificate had
previously expired. Regardless of why the dba reference was included in the agreement, it is
undisputed that Brazzel had operated his drilling business as a separate entity; that, after the
agreement was consummated, he had no drilling rigs; and that over half of his employees were now
employed by Sledge Drilling. The comptroller’s determination that Brazzel sold at least an
identifiable segment of his business has ample support. Consequently, the parties’ actions evidence
more than a mere equipment sale.
The parties’ post-execution actions, however, do not end the analysis because the contract’s
language is ultimately controlling. See E. Montgomery County Mun. Util. Dist. No. 1 v. Roman
Forest Consol. Mun. Util. Dist., 620 S.W.2d 110, 112 (Tex. 1981) (conduct of the parties is
ordinarily immaterial when determining the meaning of an unambiguous instrument).3 A restraint
is not ancillary to a contract unless it is designed to enforce a contractual obligation of one of the
parties. Light, 883 S.W.2d at 647 (citing with approval Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485
2
See TEX. BUS. ORGS. CODE ANN. § 21.455 (Vernon 2008) (requiring approval by the directors and shareholders of a corporation
when it sells all or substantially all of the assets of the corporation).
3
The agreement disclaims the parties’ ability to informally modify their agreement providing:
This Agreement may not be amended, altered, modified, or changed in any way except in a writing
signed by all the Parties specifically referencing this Agreement. Without limitation, course of performance
specifically does not modify or waive any provision herein.
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U.S. 717, 739-41 & n.3, 744-46 (1988) (Stevens, J., dissenting))4; see also DeSantis v. Wackenhut
Corp., 793 S.W.2d 670, 682 (Tex. 1990) (the otherwise enforceable agreement must give rise to the
interest worthy of protection by the covenant not to compete). Bandera Drilling transferred goodwill
when it introduced Sledge and Armour to its customers – but it was not contractually obligated to
do so. Nor was it contractually obligated to take any action to facilitate the transition of any of its
employees to Sledge Drilling.
Sledge Drilling concedes that there was no express contractual obligation but contends that
these were illusory promises that became binding obligations when performed. The Texas Supreme
Court has held that an illusory promise can furnish consideration for a covenant not to compete when
the promise is performed. See Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 651
(Tex. 2006). But there are two principle differences between that case and the present situation.
First, in Sheshunoff, the illusory promise was contained in the written contract. The actions upon
which Sledge Drilling relies were not described in the purchase agreement. Second, in Sheshunoff,
performance of the illusory promise provided mutuality. The employer made an illusory promise
to provide training and confidential information. When that promise was kept, enforcement of the
covenant followed because the employer had provided consideration for the employee’s reciprocal
promise. Here, the post-execution actions were taken by Brazzel or Bandera Drilling. Because they
are the restrained parties, their actions, by definition, cannot provide mutuality.
Sledge Drilling alternatively argues that the covenant is enforceable because Brazzel and
Bandera Drilling’s promise of future performance can be inferred. The Texas Supreme Court has
held that a covenant not to compete is enforceable if the agreement to furnish consideration for that
covenant can be inferred because of the nature of the contract. See Mann Frankfort Stein & Lipp
Advisors, Inc. v. Fielding, No. 07-0490, 2009 WL 1028051 (Tex. April 17, 2009). In Fielding, an
accounting and consulting firm hired a CPA to work as a senior manager in its tax department. The
employment agreement included a covenant not to compete. Unlike Sheshunoff and Light, the
employer made no express promise to provide the CPA with confidential information, but the court
4
In the employee/employer context, the supreme court has recognized two requirements for making this determination: (1) the
consideration given by the employer in the agreement must give rise to the employer’s interest in restraining the employee from
competing and (2) the covenant must be designed to enforce the employee’s consideration or return promise in the agreement. See
Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, No. 07-0490, 2009 WL 1028051, at *4 (Tex. April 17, 2009). Those
requirements cannot be applied verbatim to commercial transactions such as this because the restrained party is providing rather than
receiving the protectable interest. But the court’s concern that naked restraints of trade be avoided can be addressed.
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found that, because he was being hired to perform work that required the receipt of confidential
information, this promise could be inferred. Id. at *5.
The purchase agreement in this case supports no similar inference. The extrinsic evidence
makes clear that Sledge Drilling intended to operate in West Texas and that it effectively acquired
a West Texas going concern, but the contract’s written terms would have been equally satisfied if
Sledge Drilling had taken the rigs and equipment overseas or if Bandera Drilling had refused to make
any introductions or provide any personnel information. Cf. id. at *6 (“The circumstances
surrounding Fielding’s employment indicate that his employment necessarily involved the provision
of confidential information by Mann Frankfort before Fielding could perform the work he was hired
to do.”).
If Bandera Drilling and Brazzel were required to do nothing beyond the express terms of the
contract, the covenant is a naked restraint of trade and is, therefore, unenforceable. See Light, 883
S.W.2d at 647 (covenants cannot be a stand-alone promise lacking any new consideration). It can
be argued that equity requires implying the terms necessary to make the covenant enforceable
because Brazzel is otherwise allowed to violate an agreement that he helped draft (and he retains all
of the money he received for signing it) simply because an “i” was not dotted or a “t” was not
crossed. This is no less true considering that Brazzel’s justification for violating the covenant flies
in the face of the facts and that it is apparent he chose to do so because he had an excess rig and
thought he could without liability. Terms are not to be implied in a contract because they are
reasonable but because they are necessarily involved in the contractual relationship and are such that
the parties must have intended them and failed to express them only because of sheer inadvertence
or because they are too obvious to need expression. See Fielding, 2009 WL 1028051, at *5. The
conveyance of Bandera Drilling’s business goodwill cannot be inferred because it does not meet this
test.
Finally, Sledge Drilling contends that the assignment’s reference to intangible rights makes
the covenant enforceable. The assignment and bill of sale conveyed “all of [Bandera Drilling’s]
rights, title and interest, tangible and intangible” in the six rigs and associated equipment. Sledge
Drilling argues that the only reasonable interpretation of this document is that Bandera Drilling
transferred current and prospective relationships with rig employees and customers and intellectual
property in the form of employee personnel files. Sledge Drilling does not contend that the
employees themselves were assigned but notes that, at the time of the sale, there was a small pool
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of qualified employees and contends that it had a legitimate business interest in retaining Bandera
Drilling’s former employees to staff its rigs. Bandera Drilling’s introductions, the transfer of at least
a portion of the rig hands’ personnel files, and Bandera Drilling’s promise not to compete in West
Texas facilitated that business interest.
The intangible rights Sledge Drilling describes could support a covenant because they could
be part of a business’s goodwill, but they were not conveyed by the assignment because they are not
intrinsic to the rigs or equipment. They are, instead, associated with an ongoing concern. What
intangible rights the assignment conveyed is not clear, but Sledge Drilling does not contend that
there was anything unique about the physical assets it purchased that would provide a competitive
advantage. Consequently, the assignment cannot provide the mutuality required to make the
covenant enforceable.
The trial court erred when it found that the reformed covenant not to compete was
enforceable. The trial court’s judgment is reversed, and the cause is remanded for further
proceedings not inconsistent with this holding or the parties’ settlement agreement. This holding
makes it unnecessary to consider Brazzel and Bandera Drilling’s second issue.
IV. Holding
The judgment of the trial court is reversed, and the cause is remanded.
RICK STRANGE
JUSTICE
August 6, 2009
Panel consists of: Wright, C.J.,
McCall, J., and Strange, J.
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