IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
February 12, 2009
No. 08-20152 Charles R. Fulbruge III
Clerk
FLINT HILLS RESOURCES LP
Plaintiff-Appellant
v.
JAG ENERGY INC
Defendant-Appellee
Appeals from the United States District Court
for the Southern District of Texas
Before GARWOOD, GARZA, and OWEN, Circuit Judges.
EMILIO M. GARZA, Circuit Judge:
In this contract case, Flint Hills Resources LP (“Flint Hills”) appeals from
the district court’s judgment in favor of JAG Energy Inc. (“JAG”). The district
court determined that Flint Hills breached the parties’ contract by unreasonably
suspending its own performance. For the following reasons, we reverse the
district court and render judgment in favor of Flint Hills.
I
This dispute arose from a contract to supply natural gas condensate in
south Texas. Flint Hills, a refiner of crude oil products, agreed to purchase
“[a]pproximately 1,000 barrels per day” of “Mexican Condensate” from JAG, a
broker in such products. The agreement permitted either party to cancel the
No. 08-20152
arrangement with one month’s notice. The contract began without incident in
December of 2005. In mid-March of 2006, Flint Hills employee Rhonda Schlatter
(“Schlatter”) attended a business lunch with Rodrigo Aranda (“Aranda”) of PMI
Trading (“PMI”). PMI is the marketing arm of Pemex, the Mexican national oil
company and the only authorized seller of freshly extracted Mexican condensate.
At this lunch meeting, Aranda allegedly told Schlatter that PMI/Pemex had been
experiencing thefts of condensate in Mexico and warned that other companies
might be selling this stolen condensate in the United States. Aranda did not
name JAG or any other specific company as a suspected seller of the stolen
condensate.
Schlatter reported this information to her supervisors, and Flint Hills
immediately engaged a Washington D.C. law firm and a Mexico City law firm
to advise Flint Hills about its rights and obligations. The Mexican law firm
confirmed that there was an ongoing investigation into thefts of condensate in
Mexico but offered no specific information. The D.C. law firm advised Flint Hills
that continuing to purchase condensate from JAG could subject Flint Hills to
criminal liability if the product was in fact stolen. Flint Hills did not attempt to
contact Aranda or anyone at PMI/Pemex for further investigation.
On March 24, Flint Hills informed JAG that they refused to accept further
deliveries due to a legal issue. On March 26, Flint Hills clarified that it was
suspending payments until JAG provided title evidence demonstrating that
JAG’s condensate was purchased from PMI/Pemex at some point downstream.
JAG responded by identifying two of its immediate suppliers and promising to
forward documents showing that Pemex was “the first link in one of these
chains.” No such documents were ever produced by JAG. After several more
weeks of discussion on this title issue, Flint Hills sent a letter cancelling the
agreement on May 16. JAG subsequently brought a contract claim in the district
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No. 08-20152
court, alleging that Flint Hills breached the parties’ agreement by withholding
payment.
The district court held a bench trial and applied Texas contract law. After
considering the evidence and the parties’ contract, the court determined that
Flint Hills had overreacted to a vague rumor and acted unreasonably in
suspending payment. The court also determined that JAG acted reasonably in
refusing to provide a chain of title linking the condensate back to Pemex, as it
was industry practice to conceal suppliers for competitive reasons. Accordingly,
the district court held that Flint Hills had breached the agreement and awarded
JAG damages for the period between March 25 and July 1. Flint Hills now
appeals this determination of breach.
II
On appeal from a judgment after a bench trial, we review findings of fact
for clear error and conclusions of law de novo. Houston Exploration Co. v.
Halliburton Energy Servs., Inc., 359 F.3d 777, 779 (5th Cir. 2004). We assume
arguendo that the district court’s determination that Flint Hills breached the
contract constitutes a finding of fact. We have stated that it is “well-settled that
whether the parties’ conduct constitutes breach presents a pure question of fact
. . . .” Concise Oil & Gas P’ship v. La. Interstate Gas Corp., 986 F.2d 1463, 1469
(5th Cir. 1993) (internal quotation marks omitted); see also Leson Chevrolet Co.
v. Oakleaf & Associates, Inc. 796 F.2d 76, 79 (5th Cir. 1986) (per curiam)
(reviewing the district court’s finding of breach under a clearly erroneous
standard). “A finding of fact is clearly erroneous when, although there is
evidence to support it, the reviewing court based on all the evidence is left with
the definitive and firm conviction that a mistake has been committed. However,
factual findings made under an erroneous view of controlling legal principles are
reviewed de novo.” Houston Exploration, 359 F.3d at 779 (internal citations and
quotation marks omitted).
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No. 08-20152
III
Flint Hills contends that the district court erred in finding that Flint Hills
breached the parties’ contract by suspending payment based on its general
suspicions of theft. In relevant part, the contract provided as follows:
[Paragraph 5]: In the event of any adverse claim, lien, dispute
or lack of information affecting or concerning title to the property or
to the crude oil proceeds from lands described in this agreement,
Buyer may withhold payment for the crude oil until the claim, lien,
dispute or lack of information is settled or resolved, without liability
for interest. If requested, Seller agrees to furnish evidence of title
satisfactory to Buyer.
****
[Paragraph 14]: In the event that either party shall default in
any payment or other performance under this or any other agreement
exiting by and between the parties hereto, . . . [then] the other party,
at its option, shall have the right to withhold any payments or any
deliveries of crude oil and/or condensate due under this or any other
such agreement . . . .
(Emphasis added). The district court interpreted this language to create
a limited right to withhold payment—one available where a third-party brings
an adverse claim of ownership or where there is objective evidence of bad title.1
In evaluating Flint Hills decision to withhold payment, the court repeatedly
1
The district court made the following relevant findings of fact and conclusions of law:
13. Flint Hills had the opportunity to withhold payment “in the event of
any adverse claim, lien, dispute or lack of information affecting” title. At no
time, did an adverse claim exist to condensate delivered by JAG to Flint Hills.
14. Without an adverse claim to the condensate, Flint Hills’ non-
payment was commercially unreasonable.
****
18. Flint Hills breached the contract when it rejected additional
condensate on March 24 through July 1. Flint Hills had no commercial basis to
reject the condensate. The absence of an adverse claim or plausible factual
support for a question of title made Flint Hills’ arbitrary quibbling about the
sequence of sales categorically unreasonable.
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No. 08-20152
emphasized that Flint Hills had “overreacted”to a vague rumor and inadequately
investigated the general allegations of theft. On this basis, the court held that
Flint Hills breached the contract by withholding payment.
After a review of the record, we find that the district court committed clear
error. The district court’s focus on the reasonableness of Flint Hills’ own
investigation was inconsistent with the contract language. Under the plain
terms of the agreement, Flint Hills could suspend payment upon any “dispute
or lack of information affecting” title. This right to suspend payment based on
a lack of information was not conditioned on the presence of an adverse claim,
verifiable proof of theft, or objective evidence of wrongdoing. Furthermore, the
contract unconditionally provided that “[i]f requested, [JAG] agrees to furnish
evidence of title satisfactory to [Flint Hills].”
Applying these terms to the undisputed facts, we find that Flint Hills did
not commit breach: Flint Hills was concerned about the source of JAG’s product.
Exercising its contractual rights, Flint Hills requested evidence of title tying
JAG’s condensate back to Pemex and suspended its purchases until this “lack of
information” was resolved. JAG was then obligated to provide “satisfactory”
evidence of title. After initially promising to do so, JAG ultimately failed to
provide any reliable evidence that its condensate was purchased through Pemex
at some point downstream.2 When it became clear that JAG could not or would
not provide this requested evidence, Flint Hills cancelled the arrangement.
Thus, the “lack of information” regarding title was never resolved. Regardless
of whether Flint Hills’ initial suspicious were objectively reasonable, its
2
The district court acknowledged that JAG failed to provide this evidence of title but
reasoned that it was “industry practice” for a broker to conceal its suppliers. While this may be an
accurate observation of the oil-products industry generally, it is not relevant under the contract
language. JAG unconditionally agreed to furnish satisfactory evidence of title upon Flint Hills’
request.
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No. 08-20152
subsequent conduct was at all times authorized under paragraphs 5 and 14 of
the contract.
In sum, the district court erred in concluding that Flint Hills breached the
contract. Even if we credit all of the court’s factual findings—that Aranda’s
comment was disingenuous, that Flint Hill’s investigation was inadequate, and
that Flint Hills overreacted—Flint Hills was nevertheless entitled to request
evidence of title and suspend payment until any “lack of information” was
resolved to its satisfaction. The district court improperly imposed extra-
contractual requirements of commercial reasonableness and verifiable proof on
Flint Hills. Thus, the district court committed clear error in determining that
Flint Hills breached the contract.3
IV
Viewing the record as a whole, we are convinced that Flint Hills’ actions
were consistent with its contractual rights. Accordingly, we REVERSE the
judgment of the district court and RENDER a take-nothing judgment in favor
of Flint Hills.
3
Flint Hills also contends that the district court erred in (1) excluding Flint Hill’s expert
witness, (2) calculating damages, and (3) finding Flint Hill’s suspension of performance
unreasonable under the Uniform Commercial Code. Because we find that Flint Hills did not
breach the contract, these claims are moot and we do not address them.
6