Kachina Pipeline Company, Inc. v. Michael D. Lillis
471 S.W.3d 445
| Tex. | 2015Background
- Kachina Pipeline (Buyer) gathered, transported, and resold natural gas produced by Michael Lillis (Seller) under a 2005 Gas Purchase Agreement (GPA). Title passed at metering delivery points located near Lillis’s wells.
- GPA required Seller to deliver gas at pressure sufficient to enter Kachina’s pipeline; it provided that "neither party shall be obligated to compress any gas."
- The GPA stated: if Buyer installs compression to effect delivery of Seller’s gas, Buyer may deduct its actual compression installation/repair/maintenance/operation costs plus 20% from Seller’s proceeds.
- Kachina operated existing compression (Barker station installed 2003) and added compression in 2007; Kachina deducted a pro rata share of system compression costs from Lillis’s proceeds as part of marketing fees.
- Lillis contracted directly with Davis and built his own pipeline; he sued claiming Kachina breached the GPA by deducting compression costs incurred after title passed and sought an accounting; Kachina counterclaimed it properly deducted costs and validly extended the GPA term via its option.
- Trial court granted summary judgment to Kachina on both deductions and extension; the court of appeals reversed as to both; the Supreme Court of Texas affirmed the court of appeals.
Issues
| Issue | Plaintiff's Argument (Lillis) | Defendant's Argument (Kachina) | Held |
|---|---|---|---|
| Whether the GPA authorized deductions for compression costs Kachina incurred after gas transferred to Buyer | Deductions are unauthorized because the provision applies only to compression Buyer installs to overcome Seller’s inability to deliver at the delivery-point working pressure (i.e., compression installed during the Agreement term to "effect delivery" when a well cannot deliver) | The compression provision covers any compression that aids final delivery to Davis (including preexisting or downstream compression) and therefore Kachina may deduct a pro rata share of system compression costs | GPA unambiguously permits deductions only for compression that Buyer installs to effect delivery when a well cannot deliver against Buyer’s working pressure; not for general system compression absent evidence it was installed for that contingency |
| Whether the GPA’s option to "continue the purchase of gas under the terms of this Agreement" when matching a third-party offer allowed Kachina to extend the initial five-year term for another five years | Lillis: option preserves the existing agreement’s terms but does not import a new fixed initial term; Buyer may only continue under the Agreement (i.e., month-to-month after initial term) with price adjustments | Kachina: option allows Buyer to continue under the Agreement in a way that imports the five-year initial term from a third-party offer, effectively extending the contract another five years | Option does not authorize creating a new five-year initial term; Buyer’s continuation is confined to the Agreement’s existing structure and only permits price adjustments to yield the same economic benefit to Seller |
| Whether extrinsic evidence of parties’ intent or course of dealing could be used to expand the compression-deduction right | Lillis: parol and subjective evidence cannot create ambiguity where the contract is unambiguous | Kachina: prior course of dealing and testimony show Lillis understood and acquiesced to allocation of system compression costs, supporting broader meaning | Court: the compression provision is unambiguous; extrinsic evidence of subjective intent or prior broader contract cannot be used to vary its clear terms |
| Whether attorney’s fees awarded to Kachina should be sustained after reversal of declaratory relief | Lillis: remand for fee determination if appellate reversal affects declaratory judgment outcomes | Kachina: prevailed on some issues, so fee award should remain | Court: because Kachina lost on two principal issues, remand the fee award for reconsideration consistent with the opinion |
Key Cases Cited
- Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211 (Tex. 2003) (standard of review for traditional summary judgment)
- Tawes v. Barnes, 340 S.W.3d 419 (Tex. 2011) (construction of unambiguous contract is a question of law)
- Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323 (Tex. 2011) (extrinsic evidence may be considered only when a contract is ambiguous)
- Dynegy Midstream Servs., Ltd. P’ship v. Apache Corp., 294 S.W.3d 164 (Tex. 2009) (court determines ambiguity as a matter of law)
- National Union Fire Ins. Co. of Pittsburgh, Pa. v. CBI Indus., Inc., 907 S.W.2d 517 (Tex. 1995) (plain writing controls; industry custom cannot override clear contract terms)
- Solar Applications Eng’g, Inc. v. T.A. Operating Corp., 327 S.W.3d 104 (Tex. 2010) (conditional language generally required to make performance specifically conditional)
- FPL Energy, LLC v. TXU Portfolio Mgmt. Co., 426 S.W.3d 59 (Tex. 2014) (contracts construed to harmonize all provisions)
- Sun Oil Co. (Del.) v. Madeley, 626 S.W.2d 726 (Tex. 1981) (party’s internal accounting or subjective interpretation cannot vary written contract)