SABA ZI EXPLORATION, LP, Appellant, v. LANE VAUGHN, Terry Selland, and Fort Peck Oil & Gas, L.L.C., Appellees.
No. 14-13-00325-CV.
Court of Appeals of Texas, Houston (14th Dist.).
Sept. 16, 2014.
Michael A. Caddell, Randall O. Sorrels, Houston, Mitchell A. Toups, Beaumont, for Appellees.
Panel consists of Chief Justice FROST and Justices JAMISON and WISE.
OPINION
MARTHA HILL JAMISON, Justice.
This case turns on the interpretation of a settlement agreement governing the distribution of funds following the sale of certain mineral leases. After the sale of the leases, appellant Saba Zi Exploration, L.P., a party to the settlement agreement, filed an interpleader action regarding the proceeds, and appellees Lane Vaughn, Terry Selland, and Fort Peck Oil & Gas, L.L.C. (collectively “Vaughn“),1 also signatories, filed a counterclaim, alleging that Saba Zi‘s proposed distribution breached the agreement. After a trial to the bench, the court ordered Saba Zi to deposit $562,957 into the registry of the court and assign Vaughn an overriding royalty interest in the mineral leases of 1.64%.
On appeal, as in the trial court, the parties principally dispute whether the terms of the settlement agreement permitted certain alleged expenses to be deducted from the sale proceeds by Saba Zi before distribution to Vaughn and the conveyance of overriding royalty interests to third parties. In three issues, Saba Zi contends that (1) the trial court inaccurately interpreted the settlement agreement, (2) the trial court erroneously placed the burden of proof on Saba Zi to disprove Vaughn‘s allegations, and (3) the evidence is legally and factually insufficient to support the trial court‘s judgment. We modify the trial court‘s judgment to change the amount of the overriding royalty interest assigned to Vaughn from 1.64% to .82%, and as so modified, we affirm.
I. Background
In the original dispute among these parties and others, Vaughn claimed an instrumental role in helping Saba Zi obtain mineral leases in the Bakken shale formation in eastern Montana and a consequent enti
On April 5, 2012, Saba Zi filed an interpleader petition with the trial court.5 In its petition, Saba Zi stated that the mineral leases had been sold and it was ready to distribute settlement proceeds and the retained overriding royalty interests.6 Saba Zi further offered to deposit into the court‘s registry $255,101.10 and convey an overriding royalty interest of .82% to Vaughn. Saba Zi sought a release and discharge of all liabilities in the matter as well as attorney‘s fees. Vaughn answered and filed a counterclaim, alleging Saba Zi breached the contract and seeking an accounting.
The trial court held a one-day bench trial during which only one witness testified—Saba Zi‘s representative, Brian Burr—and only a few documents were admitted as exhibits.7 The court and the parties initially discussed which side was required to put on their case first, with the court ultimately deciding Saba Zi had the burden. The only disputes presented at trial for the court‘s determination were what expenses Saba Zi was entitled to deduct from the sale proceeds before distribution and whether Saba Zi could con
Specifically regarding the expenses, Vaughn challenged Saba Zi‘s right to deduct $600,000 it listed as “capital raise” (essentially repayment of funds from investors along with a 100% return on those funds) and another $500,000 it reported as a management fee.8 As to the overriding royalty interests, Saba Zi asserted that it conveyed a 1% interest each to the Campbell Group and Bob Burr (Brian Burr‘s father) for services it otherwise could not have afforded given its financial condition. In an order issued after trial, presenting the court‘s findings and holdings, the court rejected Saba Zi‘s request to deduct the $600,000 “capital raise” and permitted it to deduct only $350,000 of the claimed $500,000 management fee. The court further rejected Saba Zi‘s request to convey an overriding royalty interest to the Campbell Group and Bob Burr. Ultimately, the trial court ordered that Vaughn was entitled to receive $562,957 and an overriding royalty interest of 1.64% from Saba Zi. The court further granted attorney‘s fees ($11,300) and costs to Saba Zi for its interpleader action and discharged it from the suit. This appeal followed.
II. Burden of Proof
In its second issue, Saba Zi contends that the trial court erred in assigning it the burden of proof at trial. In its order, the trial court stated “The Court rules that Saba Zi has the burden of proving that its expenses were in compliance with the agreements.” Because resolution of this issue may impact our analysis of the substantive issues, we will consider it first.
According to Saba Zi, the real issues in this case all stem from Vaughn‘s breach-of-contract counterclaim, and thus, Vaughn should have borne the burden. In response, Vaughn asserts that Saba Zi properly had the burden of proof because (1) it was the plaintiff in the interpleader action and (2) it possessed peculiar knowledge regarding the key facts in the case, which principally concerned Saba Zi‘s expenses and accounting therefor. Vaughn additionally argues that even if the court erred in assigning the burden of proof, any such error was harmless.
We begin by noting that Vaughn‘s first suggestion is incorrect. The issues tried in the bench trial were related to Vaughn‘s breach-of-contract counterclaim, not Saba Zi‘s interpleader action. An interpleader plaintiff is entitled to relief if three elements are met: (1) it is either subject to, or has reasonable grounds to anticipate, rival claims to the same fund or property;9 (2) it has not unreasonably delayed filing the action in
In the second suggestion, Vaughn contends the trial court properly assigned the burden to Saba Zi because it possessed “peculiar knowledge” of the facts in dispute. Courts have used this theory to shift the burden on particular issues under particular circumstances. See, e.g., Raw Hide Oil & Gas, Inc. v. Maxus Exploration Co., 766 S.W.2d 264, 272 (Tex.App.-Amarillo 1988, writ denied) (holding party that completed wells in a manner which created allocation and ownership problems should bear burden of proof as to those issues because it possessed “peculiar knowledge” of the facts); Dessommes v. Dessommes, 505 S.W.2d 673, 679-80 (Tex. Civ. App.-Dallas 1974, writ ref‘d n.r.e.) (holding “considerations of fairness, convenience and policy require[d] imposition of the burden on the former husband to prove what portion of the commingled retirement fund [wa]s attributable to contributions of his separate property[, as t]he commingling of funds was the result of his acts rather than” the wife‘s). We do not agree, however, that the circumstances of this case require application of this theory here.12 The question of whether Saba Zi properly deducted expenses and calculated Vaughn‘s share was not a discrete issue in this case but was at the heart of Vaughn‘s breach-of-contract allegations. Moreover, unlike in Raw Hide, Dessommes, and similar cases, there is no allegation that Saba Zi did anything to render proving the propriety or impropriety of the expenses difficult. See Raw Hide Oil & Gas, 766 S.W.2d at 272 (explaining party completed wells in a manner which created allocation and ownership problems); Dessommes, 505 S.W.2d at 679-80 (explaining husband comingled retirement funds). Although much of the information needed to show a breach of contract would have been in Saba Zi‘s possession, there is no allegation
Accordingly, we conclude the trial court erred in assigning the burden of proof to Saba Zi to disprove Vaughn‘s breach-of-contract allegations. However, under
Although Saba Zi states generally that “[f]ew errors are of greater importance than errors regarding which party bears the burden of proof,” it does not provide any argument as to how it was harmed by the court‘s alleged error under the circumstances of this case. Trial court error in assigning the burden of proof can be determined to be harmless under appropriate circumstances. Compare In re K.K., No. 2-04-269-CV, 2006 WL 133506, at *2 (Tex.App.-Fort Worth Jan. 19, 2006, no pet.) (mem. op.) (holding trial court‘s error in placing burden of proof on defendant in de novo appeal from associate judge‘s ruling was harmless where defendant did not contend he was prevented from developing all of the relevant facts and it did not appear that defendant suffered any injury on account of this error), and Tex. Real Estate Comm‘n v. Sandefur, 279 S.W.2d 954, 955 (Tex.Civ.App.-Fort Worth 1955, no writ) (holding court‘s possible error in assigning burden of proof was harmless where appellant did not contend it was prevented from developing all of the facts and it did not appear that appellant suffered any injury on account of this error), with FPL Farming Ltd. v. Envtl. Processing Sys., L.C., 383 S.W.3d 274, 285 (Tex.App.-Beaumont 2012, pet. granted) (holding error in assigning burden of proof was harmful where the issue in question was hotly contested and party “used the error to its advantage in final argument“), and Bargsley v. Pryor Petroleum Corp., 196 S.W.3d 823, 830 (Tex. App.-Eastland 2006, pet. denied) (holding error in assigning the burden of proof on critical issue was harmful where “jury easily could have thought that neither side could prove th[e] issue“).
As will be discussed in detail below, resolution of the disputed issues in this case largely revolves around construction of the settlement agreement between the parties and sections of Saba Zi‘s Limited Partnership Agreement (as incorporated into the settlement agreement) as well as the trial court‘s assessment of the only witness‘s testimony. We will therefore make our determination regarding possible harm injected by the use of the wrong burden of proof as we discuss each of the disputed issues.13
III. Contract Construction and Evidence
In its first issue, Saba Zi contends that the trial court improperly interpreted the settlement agreement. In its third issue, Saba Zi challenges the legal and factual sufficiency of the evidence to support the trial court‘s judgment.
The construction of an unambiguous written contract is a question of law for the court. See Matagorda Cnty. Hosp. Dist. v. Burwell, 189 S.W.3d 738, 740 (Tex.2006). Whether a contract is ambiguous is also a question of law; one that must be decided by examining the contract as a whole in light of the circumstances present when the contract was entered. Anglo-Dutch Petroleum Int‘l, Inc. v. Greenberg Peden, P.C., 352 S.W.3d 445, 449-50 (Tex.2011). When construing a contract, we must ascertain the true intentions of the parties as expressed in the writing itself. See Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 333-34 (Tex.2011). In identifying the intention of the parties, 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. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 662 (Tex.2005). If, after the rules of construction are applied, the contract can be given a definite or certain legal meaning, it is unambiguous and we construe it as a matter of law; on the other hand, an agreement is ambiguous, creating a fact issue on the parties’ intent, if it is susceptible to more than one reasonable interpretation. See Ashford Partners, Ltd. v. ECO Res., Inc., 401 S.W.3d 35, 38-39 (Tex.2012).
We begin our analysis with the contract‘s express language. Italian Cowboy Partners, 341 S.W.3d at 334; see also Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983) (“If the written instrument is so worded that it can be given a certain or definite legal meaning or interpretation, then it is not ambiguous and the court will construe the contract as a matter of law.“). Contract terms are given their plain, ordinary, and generally accepted meanings unless the contract itself shows them to be used in a technical or different sense. Valence Operating Co., 164 S.W.3d at 662.
Where the parties have entered into an unambiguous written contract, the instrument alone will be deemed to express the intention of the parties because it is the objective intent, not subjective intent, that controls. Matagorda Cnty. Hosp. Dist., 189 S.W.3d at 740. An unambiguous contract will be enforced as written, and parol evidence will not be received for the purpose of creating an ambiguity or to give the contract a meaning different from that which its language imports. Anglo-Dutch Petroleum, 352 S.W.3d at 451. The parol evidence rule, however, does not prohibit consideration of surrounding circumstances that inform rather than vary from or contradict the contract text, including the commercial or other context in which the contract was executed. Houston Exploration Co. v. Wellington Underwriting Agencies, Ltd., 352 S.W.3d 462, 469 (Tex.2011).
When reviewing for legal sufficiency, we consider the evidence in the light most favorable to the finding and indulge every reasonable inference that supports the challenged finding. City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005). We credit favorable evidence if a reasonable factfinder could and disregard contrary evidence unless a reasonable factfinder could not. Id. at 827. If there is more than a scintilla of evidence to support the finding, the legal-sufficiency challenge fails. BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789, 795 (Tex.2002). In reviewing the factual sufficiency of the evidence, we consider and weigh all of the evidence and set aside the judgment only if it is so contrary to the overwhelming weight of the evidence that it is clearly wrong and manifestly unjust. Cain v. Bain, 709 S.W.2d 175, 176 (Tex.1986). The trial court acts as the factfinder in a
B. Analysis
As set forth above, the parties contest two cost deductions Saba Zi requested—for a $500,000 management fee and a $600,000 “capital raise“—as well as Saba Zi‘s conveyance of a 1% retained overriding royalty interest each to the Campbell Group and Bob Burr. In general, Saba Zi contends that in construing the agreement, the trial court ignored the plain meaning of the settlement agreement and instead relied on the argument of Vaughn‘s counsel. We will discuss each disputed item in turn.
1. $500,000 Management Fee
The trial court found that Saba Zi could validly deduct $350,000 of the management fees claimed after the date of settlement, but that $150,000 of the fees should be disallowed. The court based this calculation on its interpretation of Brian Burr‘s testimony that the management fee was $25,000 a month and that work to sell and market the mineral leases continued through September 2011.14 The court then determined that the time from the date of settlement (August 2010) to the date closing work concluded (September 2011) was fourteen months and multiplied that number by the amount of the appropriate management fee to get the $350,000 permissible total (14 x $25,000 = $350,000). In making this calculation, the trial court appears to have concluded that under the terms of the settlement agreement, post-settlement fees had to be reasonable and necessary in order to be deducted. Saba Zi disagrees.15
According to Saba Zi, under a proper interpretation of the settlement agreement, it was entitled to deduct all management fees, without limitation. The basis of Saba Zi‘s contention rests in the fact that paragraph 2 of the settlement agreement, establishing the amount Vaughn was to receive from the sale of the mineral rights, incorporates Article VI of Saba Zi‘s Limited Partnership Agreement. Saba Zi contends that Article VI allows management fees to be deducted before the amount of cash distributions is calculated and, thus, the management fees were not subject to the settlement agreement‘s “reasonable and necessary” requirement.
In relevant part, paragraph 2 states,
Vaughn shall receive 41% of any Distributable Cash (as defined in Article VI of the Saba Zi Exploration Limited Partnership Agreement) payable to [TBG] from the sale of the 31,273 acres, after and subject to all expenses, debts, and indemnity obligations that Saba Zi is
obligated to pay under its partnership agreement to be capped at $4.5 million in historic costs and subject only to further future reasonable and necessary expenses needed to market and/or sell the leases.16
And, Article VI of Saba Zi‘s Limited Partnership Agreement states in relevant part:
ARTICLE VI
DISTRIBUTIONS
Section 6.1. Distributable Cash. Except as otherwise provided in Article XIII hereof, and subject to the limitations contained in Section 6.4 hereof, the General Partner shall determine the amount of Net Cash Flow, if any, at the end of each Fiscal Quarter. Not later than the thirtieth (30th) day after the end of each Fiscal Quarter, the General Partner will cause the Partnership to distribute the Net Cash Flow to the Partners as follows:
(a) First, to the Investment Limited Partner until the cumulative amount distributed to the Investment Limited Partner under this subparagraph 6.1(a) after any withholding under Section 6.3 of this Agreement is equal to the sum of (i) the aggregate Capital Contributions by the Investment Limited Partner; (ii) the amount necessary for the Investment Limited Partner to maintain a reserve against future expenses which together with all other reserves for such purposes shall be equal to $250,000; (iii) the management fees payable by the Investment Limited Partner to its general partner with respect to any amounts distributed to the Investment Limited Partner; and (iv) the amount, if any, of all distributions to be made by the Investment Limited Partner to its general partner or otherwise that have priority over distributions by the Investment Limited Partner to the limited partners of the Investment Limited Partner on a prorate basis.
(b) The balance, if any, to the Partners in accordance with their Percentage Interest at the time of such distribution.
(Emphasis added.)
Under Saba Zi‘s interpretation, the limitations contained in paragraph 2 of the settlement agreement (including the requirement future expenses be reasonable and necessary to market or sell the leases) do not apply to the management fees referenced in Article VI, as they are deducted before the amount of Distributable Cash is calculated. According to Saba Zi, the paragraph 2 limitations only apply to expenses taken after the amount of Distributable Cash is calculated.
The Vaughn Parties posit instead, and the trial court appears to have agreed, that the management fees incurred post-settlement relate to the marketing and selling of the leases and, as such, they can only be deducted under the settlement agreement if they are reasonable and necessary. We conclude that the management fee is an expense to be paid under the partnership agreement rather than the settlement agreement and, as such, is not bound by the requirements of paragraph 2.17 However, we do not agree there are no
Saba Zi contends that there was no evidence at trial that the additional $150,000 in management fees was not properly deducted for the post-settlement period. But, as the court explained in its findings, and we set forth above, Burr testified that the management fee was $250,000 a year and that work continued on the sale and post-closing matters for approximately fourteen months after settlement. The evidence therefore supports the trial court‘s reducing the allowable management fees from $500,000 to $350,000.18 Additionally, because resolution of this issue concerned matter-of-law contract construction, see Matagorda County Hospital District, 189 S.W.3d at 740, and the only other evidence (Burr‘s testimony) supports the trial court‘s finding, the error in assigning the burden of proof did not cause the rendition of an improper judgment or prevent Saba Zi from properly presenting the case on appeal. See Romero, 166 S.W.3d at 225.
2. $600,000 Capital Raise
The $600,000 “capital raise” was comprised of the repayment of a $300,000 loan or investment from six “investors” along with an equal amount of interest or return on the funds. The trial court stated in its findings that Burr provided unclear testimony whether the loan/investment or the repayment was made before or after the settlement agreement was executed.19 As the trial court pointed out, if the expense was pre-settlement, it would be banned by the $4.5 million cap. The trial court further found that if the expense was post-settlement, it was not allowed under the settlement agreement, “particularly at usurious and extraordinarily unreasonable interest rates.” The court concluded, “Borrowing money and paying back outrageous returns appears to be more of a way to favor certain investors at Vaughn‘s expense, rather than conducting business under the Rule 11 Agreement limitations.”
On appeal, Saba Zi‘s only complaint regarding the $600,000 is that there was no evidence to support the trial court‘s conclusion that the expense was not reasonable and necessary. It points to Burr‘s testimony that there was no other way to raise the funds because banks and other sources would not loan Saba Zi any money due to its financial condition at the time. While the trial court accepted Burr‘s testimony regarding the inability to obtain funding from other sources, the court did not agree that the expense was “reasonable and necessary in marketing and/or sale of the leases” as required by paragraph 2 of the settlement agreement before it could be deducted in calculating the amount due to Vaughn. Indeed, Burr testified that the $300,000 was spent to pay attorneys in the ongoing litigation.20 Saba
3. Overriding Royalty Interest
As explained above, Saba Zi conveyed a 1% overriding royalty interest each to the Campbell Group and Bob Burr (Brian Burr‘s father) for services that it claimed it otherwise could not have paid for given its financial condition.21 These conveyances implicate another section of the settlement agreement, paragraph 3, which provides:
“Vaughn shall receive 41% of any Retained Royalty Interest retained or granted to TBG (as defined in Article VI of Saba Zi Exploration Limited Partnership Agreement) in the entire 31,273 acres, more or less, that Saba Zi owns.” Saba Zi argues that paragraph 3‘s reference to Article VI enabled Saba Zi to convey the interests to these entities. Section 6.2 of Article VI states in relevant part as follows:
[U]pon the sale . . . of any oil and gas or mineral leases . . . in which the Partnership retains a royalty interest in oil, gas or minerals produced from such real property (a “Retained Royalty Interests” [sic]), the General Partner shall cause the Partnership to distribute in kind and assign . . . up to 3.5% of the aggregate oil, gas and other minerals produced from the property . . . to brokers, finders, and other such unrelated third persons as the Partnership has entered into agreements to assign Retained Royalty Interests.22
(Emphasis added.)
In its findings, the trial court pointed out that the conveyances were for
As set forth above, paragraph 3 of the settlement agreement gave Vaughn 41% of any Retained Royalty Interest that TBG was entitled to receive, as defined in Article VI. Unlike paragraph 2, dealing with Distributable Cash, paragraph 3 does not contain any additional limitations or requirements. Under Article VI, Saba Zi was authorized to convey a royalty interest up to 3.5% to “brokers, finders, and other such unrelated third persons as the Partnership has entered into agreements to assign Retained Royalty Interests” before calculation of the interest to be assigned to TBG (and, under the settlement agreement, to Vaughn). The trial court appears to have accepted that such agreements were made—to convey 1% each to the Campbell Group and Bob Burr—but determined that the $4.5 million cap on historic expenses barred the conveyances. The court expressed particular concern that
[w]ith historic expenses capped, Vaughn would have no reason to believe that overriding royalty interests would be conveyed, or had been promised. The expansive interpretation of the partnership agreement offered by Saba Zi which would allow it to move 2% overriding royalty interest out of the Vaughn equation for any reason is too expansive.
The court‘s concerns, however, are not a proper basis for ignoring the plain language of the parties’ agreement. Even if the question of whether Vaughn had a reason to believe overriding interests had been promised were relevant to the analysis, Article VI (as incorporated into paragraph 3 of the settlement agreement) specified that up to a 3.5% interest could be conveyed before calculation of Vaughn‘s share.24 Additionally, since the trial court
The trial court additionally found that the conveyance to Bob Burr was barred by Article VI‘s limitation that royalty interests could only be assigned to “unrelated third persons.” The question then becomes whether Bob was a related third person under the terms of the Limited Partnership Agreement.26 On this point, Vaughn argues, and the trial court apparently found, that Bob was excluded from receiving a royalty interest because of his father-son relationship with Brian. But Brian is not a party to the Limited Partnership Agreement.27 There is no indication in the Limited Partnership Agreement that the phrase “unrelated third persons” was intended to restrict someone who was not related to the partnership itself or one of the partners, as opposed to a mere representative of the partnership. In the absence of any such indication, we interpret the phrase as only prohibiting royalty interest conveyances to “persons” related to the partnership or one of the partners. There is no argument, suggestion, or evidence that Bob had any interest in or relationship with Saba Zi, or any of the entities that were partners in Saba Zi, other than providing services in exchange for a royalty interest.28 The trial court
IV. Conclusion
We overrule Saba Zi‘s first and third issues to the degree Saba Zi complains about the disallowance of deductions for $150,000 in management fees and the $600,000 capital raise; however, we sustain these issues to the extent that Saba Zi complains regarding disallowance of the 1% conveyance each to the Campbell Group and Bob Burr. Because we cannot discern any harm resulting from the trial court‘s error in assigning Saba Zi the burden of proof in this case, we overrule Saba Zi‘s second issue.
We modify the trial court‘s judgment to change the amount of the overriding royalty interest assigned to Vaughn from 1.64% to .82%, and as so modified, the judgment is affirmed.
Notes
Section 6.2. Assignment and Distribution of Retained Royalty Interests. Except as otherwise provided in Article XIII hereof, upon the sale or other disposition of any oil and gas or mineral leases or other interest in real property in which the Partnership retains a royalty interest in oil, gas or minerals produced from such real property (a “Retained Royalty Interests” [sic]), the General Partner shall cause the Partnership to distribute in kind and assign to the Partners interests in such Retained Royalty Interests, as follows:
(a) As to any Retained Royalty Interest in the amount of 12.5% or less (the “Basic Retained Royalty Interest“):
(i) First, to the Investor Limited Partner, a royalty interest in the amount of 2.0% of the aggregate oil, gas and other minerals produced from the property on the same terms and conditions as the Retained Royalty Interest;
(ii) Next, up to 3.5% of the aggregate oil, gas and other minerals produced from the property on the same terms and conditions as the Retained Royalty Interests, to brokers, finders, and other such unrelated third persons as the Partnership has entered into agreements to assign Retained Royalty Interests;
(iii) The balance of such Basic Retained Royalty Interest, if any, to the Founder Limited Partner [TBG].
(b) As to any Retained Royalty Interest in excess of the Basic Retained Royalty Interest (the “Excess Retained Royalty Interest“), 50% of such Excess Retained Royalty Interest to the Founder Limited Partner and 50% of such Excess Retained Royalty Interest to the Investor Limited Partner.