Dallas Gas Partners, L.P. v. Prospect Energy Corp.
733 F.3d 148
5th Cir.2013Background
- In 2004 five individuals formed Dallas Gas Partners, L.P. (DGP); its general partner was MNW Partners, owned by Muse, Nelson, and Weiss.
- DGP agreed to buy Gas Solutions and sought financing from Prospect Energy; Prospect declined after due diligence but negotiated a settlement: Prospect paid ~$3.295M and Prospect received the purchase-right by acquiring the sellers’ membership interests.
- On September 23 the parties executed three documents: (1) a DGP partner consent approving assignment to MNW Partners; (2) an LLC Membership Interest Purchase Agreement between Muse, Nelson, Weiss and Prospect (which included a Mutual Release and covenant not to sue and authorized recovery of “actual damages”); and (3) a Consent and Agreement of Limited Partners of DGP ratifying the Mutual Release.
- Two months later DGP sued Prospect for fraud and other torts; Prospect counterclaimed for breach of the covenant not to sue. Prospect later sued individual sellers and the general partner for breach after evidence showed the individuals sold their MNW Partners interests to Prospect and received substantial consideration.
- The district court granted summary judgment for Prospect, holding DGP and the individual defendants were bound by the release, that Muse and Nelson (and Weiss) breached the covenant by funding and causing DGP’s suits, awarded Prospect attorneys’ fees as actual damages, and imposed joint liability. The Fifth Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether individual sellers signed and are bound individually by the LLC Purchase Agreement | Prospect: individuals signed in personal capacity and are signatories | Muse/Nelson: they signed only as DGP partners, not personally | Individuals signed the LLC agreement in their individual capacities and are bound |
| Whether individuals received consideration so as to form enforceable individual contracts | Prospect: Sellers received significant consideration ($3.295M) and ratified agreement | Muse/Nelson: no personal consideration; consideration went to DGP | Court found individuals received/retained significant consideration; contract was supported |
| Whether funding/providing support for DGP’s lawsuits constitutes breach of covenant not to sue | Prospect: covenant barred instituting, maintaining, prosecuting any action; funding/causing suits breaches | Muse/Nelson: only the named plaintiff can breach; they did not file suit | Court interpreted “maintain” to cover supporting/funding suits and held funding/causing suits breached the covenant |
| Whether attorneys’ fees are recoverable as damages for breach of covenant not to sue under New York law | Prospect: agreement permits recovery of “actual damages,” which include litigation expenses | Defendants: NY rule disallows fees absent contract/statute and requires bad faith/obvious breach to award fees | Agreement expressly authorized "actual damages"; NY authority treats litigation expenses as actual damages; fees awarded (bad-faith finding unnecessary but also supported) |
| Whether liability is joint or several for breach by multiple signatories | Prospect: parties executed a single contract; signatories jointly obligated | Defendants: use of “each” shows several obligations; negative covenant cannot sensibly be joint | NY presumes joint obligations absent words of severance; no severance here; joint liability affirmed |
Key Cases Cited
- Albemarle Corp. v. United Steel Workers, 703 F.3d 821 (5th Cir. 2013) (summary judgment standard)
- Keelan v. Majesco Software, Inc., 407 F.3d 332 (5th Cir. 2005) (argument-waiver rule on summary judgment)
- Artvale, Inc. v. Rugby Fabrics Corp., 363 F.2d 1002 (2d Cir. 1966) (litigation expenses as damages for breach of covenant not to sue; discussion of bad-faith/obvious-breach qualification)
- Lubrizol Corp. v. Exxon Corp., 957 F.2d 1302 (5th Cir. 1992) (endorsing Artvale’s approach under New York law)
- Two Guys from Harrison‑N.Y., Inc. v. S.F.R. Realty Assocs., 472 N.E.2d 315 (N.Y. 1984) (contract-construction principle to give meaning to all terms)
- United States Printing & Lithograph Co. v. Powers, 135 N.E. 225 (N.Y. 1922) (presumption that multiple obligors incur joint duty absent words of severance)