Glassell Non-Operated Interests, Ltd. v. Enerquest Oil & Gas, L. L.C.

Case: 18-20125 Document: 00514994230 Page: 1 Date Filed: 06/12/2019

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit

FILED
June 12, 2019
No. 18-20125
Lyle W. Cayce
Clerk
GLASSELL NON-OPERATED INTERESTS, LIMITED; ACG3 MINERAL
INTERESTS, LIMITED; YATES ENERGY CORPORATION,

Plaintiffs - Appellees

v.

ENERQUEST OIL & GAS, L.L.C.,

Defendant - Appellant

Appeal from the United States District Court
for the Southern District of Texas

Before HIGGINBOTHAM, ELROD, and HO, Circuit Judges.
JAMES C. HO, Circuit Judge:
A group of oil companies agreed to cooperatively develop oil prospects in
Texas. One of the parties, EnerQuest Oil & Gas L.L.C., acquired an interest
in the specified area after the agreement took effect, but then refused to offer
a share of those interests to the other parties. After the acquisition, other
parties to the agreement—Glassell Non-Operated Interests, Ltd., Yates
Energy Corporation, and ACG3 Mineral Interests, Ltd. (collectively,
“Appellees”)—filed suit against EnerQuest. Appellees alleged that EnerQuest
breached the contract by refusing to offer a pro-rata share of the newly
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No. 18-20125
acquired interests. Upon examination of the agreement, we conclude that
EnerQuest did not breach.
Although the contract requires that the parties share interests acquired
within the area of mutual interest (“AMI”), the contract excludes interests
already owned by parties from the AMI. What is excluded from the AMI at the
outset may never be included without a new agreement. Accordingly, we
reverse the judgment of the district court and render judgment for EnerQuest.
I.
EnerQuest, Glassell, Yates, and several others entered into a Letter
Agreement to develop the Dubose Field, an area in Texas. Shortly after the
Parties signed the Letter Agreement, additional parties sought to join the
endeavor. The original parties allowed the new parties to ratify the agreement
(the “Amendment”) and then the new parties officially ratified that Letter
Agreement (the “Ratification”). The Letter Agreement, Amendment, and
Ratification compose the Development Agreement.
The Letter Agreement contains an AMI provision. The parties generally
describe the AMI in § 2.1, which states that the AMI shall cover all lands
within the Dubose Field that are acquired after August 1, 2010—the “Effective
Date.” Section 2.1 then defines those interests within the AMI that are
acquired after the Effective Date as “Acquired Interest.” 1

1 In full, § 2.1 provides the following:

The AMI shall cover all lands within the 40 square miles covered by the Seitel
Agreement plus the one-half (1/2) mile halo provided for under the
COP/Seitel/Yates Agreement [i.e., the Dubose Field]. The AMI shall cover and
apply to (i) royalty interest, mineral interest, overriding royalty interest,
production payment interest, net profits interest, or any other type of interest
in oil, gas, or other minerals, (ii) any oil and gas lease, or (iii) any farmout
agreement, drilling option agreement, acreage contribution agreement, or
acreage support agreement, if such interest, lease, or agreement covers or
includes lands located wholly or partly within the AMI and which were or are
acquired after August l, 2010 (the “Effective Date”), except for any such
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No. 18-20125
But the Letter Agreement excludes some interests from the AMI.
Section 2.3 of the Letter Agreement excludes “[a]ll interests, leases or
agreements owned by a Party prior to the Effective Date.” Sections 1.4 of the
Amendment and 1.5 of the Ratification include substantially the same
provision, so the exclusions apply to both the original parties and new parties.
The parties agreed to share interests that they acquired within the AMI.
The Letter Agreement’s sharing obligation—found in §§ 2.6 and 2.7—directs
that, “[w]ithin thirty (30) business days after a Party acquires an Acquired
Interest within the AMI after the execution of this Agreement, such Party shall
promptly notify the other Parties in writing of the details of the acquisition of
such Acquired Interest.” And after an acquiring party has informed the other
parties of the gained interests, a party “may elect in writing to acquire its pro-
rata share of such Acquired Interest.”
A few years after entering the Development Agreement, EnerQuest
sought to acquire the Dubose Field interests of DKE and Pati-Dubose (the
“DKE/Pati-Dubose interests”). Both DKE and Pati-Dubose were new parties
to the Development Agreement. EnerQuest’s president emailed Yates’
president about the potential acquisition, stating that EnerQuest would be
offering the interest to the other parties pursuant to the Development
Agreement. But after the transaction closed, EnerQuest determined that the
DKE/Pati-Dubose interests were not subject to the AMI. Therefore, according
to EnerQuest, the sharing obligation did not apply.
Appellees sued EnerQuest for breach of contract. EnerQuest contested
Appellees’ construction of the Development Agreement and asserted an

interest, lease, or agreement acquired by Glassell from the Estates of Alfred C.
Glassell, Jr. or Clare A. Glassell, which are excluded from the AMI. Any such
interest, lease or agreement acquired by a Party shall be referred to herein as
an “Acquired Interest.”
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No. 18-20125
affirmative defense that the Development Agreement was unenforceable under
the Texas Statute of Frauds. See TEX. BUS. & COM. CODE § 26.01(a), (b)(4), (5).
The district court granted Appellees’ motion for summary judgment on liability
for breach of contract and denied EnerQuest’s motion for summary judgment
on the affirmative defense of a violation of the Texas Statute of Frauds.
EnerQuest appeals.
II.
A grant of summary judgment is reviewed de novo. Wallace v. Texas
Tech Univ., 80 F.3d 1042, 1046 (5th Cir. 1996) (citing Neff v. Am. Dairy Queen
Corp., 58 F.3d 1063, 1065 (5th Cir. 1995)). “The court shall grant summary
judgment if the movant shows that there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law.” FED.
R. CIV. P. 56(a).
“We look to state law for rules governing contract interpretation.”
F.D.I.C. v. Firemen’s Ins. Co. of Newark, N.J., 109 F.3d 1084, 1087 (5th Cir.
1997) (citing Clardy Mfg. Co. v. Marine Midland Bus. Loans, Inc., 88 F.3d 347,
352 (5th Cir.1996)). Texas contract law governs this dispute.
A contract’s construction is a question of law. See MCI Telecomms. Corp.
v. Texas Utils. Elec. Co., 995 S.W.2d 647, 650–51 (Tex. 1999) (citing cases). The
court must find the parties’ intent as expressed in the agreement. Sun Oil Co.
(Delaware) v. Madeley, 626 S.W.2d 726, 727–28 (Tex. 1981) (citing McMahon
v. Christmann, 303 S.W.2d 341 (Tex. 1957)). Courts give terms “their plain,
ordinary and generally accepted meaning unless the instrument itself shows
them to have been used in a technical or different sense.” W. Reserve Life Ins.
Co. v. Meadows, 261 S.W.2d 559, 564 (Tex. 1953) (citing Hall v. Mut. Benefit
Health & Accident Ass’n, 220 S.W.2d 934 (Tex. Civ. App.—Amarillo 1949, writ
ref’d)).

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No. 18-20125
A.
The question is: whether the DKE/Pati-Dubose interests should be
considered Acquired Interests according to the Development Agreement. If
they are Acquired Interests, then they are subject to the sharing obligation.
Under EnerQuest’s reading of the Letter Agreement, if any party to the
Development Agreement owns an interest in the Dubose Field before August
1, 2010, then those interests can never be part of the AMI. And because the
interests can never be part of the AMI, they can never be Acquired Interests.
Appellees read the Letter Agreement differently. According to
Appellees, even if a party owns an interest in the Dubose Field before the
Effective Date, when another party purchases that previously-owned interest
after the Effective Date, then those interests are Acquired Interests. Appellees
construe § 2.3 to mean that if a party owns interests in the Dubose Field when
that party joins the Development Agreement, then that party does not need to
share his previously owned interests. So even though DKE and Pati-Dubose
owned the interests before the Effective Date, all that matters is that
EnerQuest did not. Therefore, according to Appellees’ reading of the Letter
Agreement, EnerQuest has to offer to share those new interests, because those
interests were within the Dubose Field area and were acquired by EnerQuest
after the Effective Date.
Sections 2.1 and 2.3 describe the lands both included and excluded from
the AMI. According to § 2.1, the AMI covers various types of interests, leases,
and agreements in the Dubose Field “which were or are acquired after” the
Effective Date. And “[a]ny such interest, lease or agreement acquired by a
Party” is defined as an “Acquired Interest.” Therefore, § 2.1 provides that, to
be an Acquired Interest, the interest must be (1) within the AMI and (2)
acquired after the Effective Date.

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No. 18-20125
But the Letter Agreement further clarifies what interests are excluded
from the AMI. Section 2.3 states that “[a]ll interests, leases or agreements
owned by a Party prior to the Effective Date . . . shall not be considered part of
or subject to the AMI.” DKE and Pati-Dubose are parties to the Development
Agreement, and they owned interests in the Dubose Field before August 1,
2010. Therefore, the DKE/Pati-Dubose interests are not part of or subject to
the AMI. And because the DKE/Pati-Dubose interests are not part of the AMI,
they necessarily cannot be Acquired Interests under § 2.1.
Appellees ask us to look to the purpose of AMI provisions generally and
orient our construction according to those purposes. AMI provisions are meant
to foster cooperation among the parties to acquire and develop interests. See
Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903, 905 (Tex. 1982) (“In
an area of mutual interest agreement, the parties attempt to describe a
geographic area within which they agree to share certain additional leases
acquired by any of them in the future.”). According to Appellees, EnerQuest
acted contrary to those purposes. But we look to the plain text of the
Development Agreement—not to “what one side or the other alleges they
intended to say but did not.” Gilbert Texas Constr., L.P. v. Underwriters at
Lloyd’s London, 327 S.W.3d 118, 133 (Tex. 2010). If Appellees sought to
prohibit the type of activity in which EnerQuest engaged, they could have
easily done so through the contract. 2

2 Appellees claim that our reading would render § 2.13 of the Letter Agreement
superfluous. We disagree. That section provides that, “should Yates acquire all or any part
of the interest of Jalapeno at any time, then Yates does not have to offer that interest to the
other Parties to this Agreement. Likewise, should Jalapeno acquire all or any part of the
interest of Yates at any time, then Jalapeno does not have to offer that interest to the other
Parties to this Agreement.” Section 2.13 does not speak to the scope of the AMI, but rather
to the sharing obligation between two specific parties (Yates and Jalapeno), to the exclusion
of other parties.
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B.
In the alternative, EnerQuest contends that, even if Appellees’
construction of the contract is correct, the contract is unenforceable under the
Texas Statute of Frauds. The Texas Statute of Frauds works as an affirmative
defense. See Miller v. BAC Home Loans Servicing, L.P., 726 F.3d 717, 726 (5th
Cir. 2013); Holloway v. Dekkers, 380 S.W.3d 315, 320 (Tex. App.—Dallas 2012,
no pet.) (citing TEX. R. CIV. P. 94; TEX. BUS. & COM. CODE § 26.01(a)). Because
we have concluded that EnerQuest did not breach the agreement, the
affirmative defense is moot.
***
We reverse the district court’s judgment and render judgment for
EnerQuest.

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