IN THE TENTH COURT OF APPEALS
No. 10-08-00016-CV
BOMAR OIL & GAS, INC., Appellant v.
D. MARK LOYD, Appellee
From the 87th District Court Freestone County, Texas Trial Court No. 04-072B
MEMORANDUM OPINION
BoMar Oil & Gas, Inc. operates the Marie C. Dodge Well in which D. Mark Loyd
has an unleased mineral interest. Loyd sued BoMar for fraud and violations of the
Deceptive Trade Practices Act, alleging that improper expenses were charged against
his proportionate share of production. Loyd also sought an accounting. A jury found
for Loyd. On appeal, BoMar challenges: (1) the legal and factual sufficiency of the
evidence to support the jury’s findings on the suit for an accounting, DTPA violations,
fraud, and damages; (2) whether a non-producing cotenant is a consumer for purposes of the DTPA; and (3) whether Loyd is entitled to attorney’s fees, exemplary damages,
and prejudgment interest. We modify the judgment and affirm the judgment as
modified.
CONSUMER STATUS UNDER THE DTPA
In issue two, BoMar contends that Loyd is not a consumer for DTPA purposes.1
“Consumer” means an individual, partnership, corporation, this state, or a
subdivision or agency of this state who seeks or acquires by purchase or lease, any
goods or services. TEX. BUS. & COM. CODE ANN. § 17.45(4) (Vernon Supp. 2008).
“Goods” means tangible chattels or real property purchased or leased for use. Id. at §
17.45(1). “Services” means work, labor, or service purchased or leased for use,
including services furnished in connection with the sale or repair of goods. Id. at §
17.45(2). The goods or services purchased or leased must form the basis of the
complaint. See Melody Home Mfg. Co. v. Barnes, 741 S.W.2d 349, 351-52 (Tex. 1987).
In Hamilton v. Texas Oil & Gas Corp., 648 S.W.2d 316 (Tex. App.—El Paso 1982, no
writ), TXO sued two non-operator working interest owners to recover their shares of
drilling costs. See Hamilton, 648 S.W.2d at 319. The non-operators countersued for
damages under the DTPA. Id. The jury found that the non-operators were consumers,
but the trial court disregarded this finding. Id. On appeal, the non-operators argued
that TXO rendered services, including “directing and controlling all operations, paying
costs, and providing management, bookkeeping and supervision,” and was paid for
those services. Id. at 322. The El Paso Court disagreed:
1 BoMar raised this issue in a motion for directed verdict.
BoMar Oil & Gas, Inc. v. Loyd Page 2 …TXO was simply reimbursed for costs incurred on behalf of the operating and non-operating interest owners. Appellant did not employ TXO. Rather, there was merely a consolidation of interests. TXO was the “front man” incurring the debts for all, for which it was entitled to be reimbursed. That TXO did not intend to make a profit for what it did is a factor to be weighed. Appellant would contend that pursuant to Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535 (Tex. 1981), even if Appellant had not purchased services from TXO, he purchased from the suppliers of TXO. Although Cameron eliminated the privity requirement, and even assuming Appellant was a purchaser in this context, the suppliers did not provide the services which form the basis of the complaint and Cameron is not applicable. The purpose of operating agreements, being to spread the risk of drilling operations among several investors with the operator managing the books and making disbursements from a joint account for the benefit of all involved in the J.O.A., should not be construed, we believe, to create liabilities under the Act.
Id.; C & C Partners v. Sun Exploration & Prod. Co., 783 S.W.2d 707, 712-13 (Tex. App.—
Dallas 1989), disapproved of on other grounds by Formosa Plastics Corp. United States v.
Presidio Eng’rs & Contrs., 960 S.W.2d 41 (Tex. 1998); see Taylor v. GWR Operating Co., 820
S.W.2d 908, 910 (Tex. App.—Houston [1st Dist.] 1991, writ denied); see also Johnston v.
Am. Cometra, 837 S.W.2d 711, 717-18 (Tex. App.—Austin 1992, writ denied).
In Cox v. Davison, 397 S.W.2d 200 (Tex. 1965), the Supreme Court explained,
“[W]hen mineral property is developed by one cotenant and as a result thereof he
acquires minerals which at one time underlay the common property, the problem of
accounting to the nonconsenting cotenant arises.” Cox, 397 S.W.2d at 201-02. The right
of one cotenant to appropriate the property of another is sanctioned only because the
mineral estate is such that necessarily the rights of one cotenant must be interfered with
if another cotenant is to be permitted to exercise those rights properly belonging to him.
Id. at 203. As between the producing cotenant and the nonjoining cotenant a balance of
BoMar Oil & Gas, Inc. v. Loyd Page 3 equities has been struck. Id. The rule of accountability is the proportionate market
value of the product less the proportionate necessary and reasonable costs of producing
and marketing. Id.
When addressing whether nonconsenting cotenants were entitled to interest on
the “proportionate part of the money advanced [] to pay for producing and selling the
minerals,” Cox quoted Shaw & Estes v. Texas Consolidated Oils, 299 S.W.2d 307 (Tex. Civ.
App.—Galveston 1957, writ ref’d n.r.e.):
With reference to money necessarily and beneficially spent, the [Supreme Court] continues: “* * * the principle of contribution has no element of speculation in it. In cases of this kind it is implied that the person seeking contribution had authority from his cotenant to expend the money that was actually spent. It is the same as if he had been actually instructed by his cotenant to expend that much money for him in improving the lot. This much is implied by law.” Because the principle is so well known, it is unnecessary to cite authority for the proposition that a cotenant incurring speculative expense in connection with exploration and development of oil, gas, and mineral properties is not entitled to a personal judgment against his cotenant for reimbursement, but only to be reimbursed out of production if and when production results.
Shaw, 299 S.W.2d at 313 (quoting Stephenson v. Luttrell, 179 S.W. 260, 263 (Tex. 1915));
Cox, 397 S.W.2d at 201-02.
In light of Hamilton and Cox, BoMar contends that (1) a non-consenting cotenant
has no obligation to pay the costs of development because he is not seeking or acquiring
development of the oil or gas; and (2) just as parties to a joint operating agreement are
not consumers, neither is a non-consenting cotenant. Loyd maintains that he is a
consumer by involuntarily acquiring goods or services. See Allied Towing Service v.
Mitchell, 833 S.W.2d 577, 582 (Tex. App.—Dallas 1992, no writ) (“A party who
BoMar Oil & Gas, Inc. v. Loyd Page 4 involuntarily acquires services can qualify as a consumer under the DTPA”); see also
D/FW Commercial Roofing Co. v. Mehra, 854 S.W.2d 182, 187 (Tex. App.—Dallas 1993, no
writ) (“It is not necessary that the consumer who ‘acquires’ the services be the one who
sought the services.”). Loyd contends that Cox “actually implies that an unleased
cotenant like Loyd does acquire the goods and services that go into production, by
recognizing the money paid by the operating cotenant to be ‘money advanced…to pay for
produc[tion and marketing costs].” See Cox, 397 S.W.2d at 201; see also Shaw, 299 S.W.2d at
313. He contends that Hamilton is inapplicable because it is based on the “consensual
contractual relationship” between operators and working interest owners.
While an unleased mineral interest owner is not a party to a joint operating
agreement, Hamilton and Cox shed light on whether an unleased mineral interest owner
is a consumer. A joint operating agreement “spread[s] the risk of drilling operations”
and requires parties to the agreement to reimburse the operator for certain expenses
incurred on their behalf. Hamilton, 648 S.W.2d at 322. The law similarly requires Loyd,
a non-consenting cotenant, to reimburse BoMar for proportionate necessary and
reasonable costs of marketing and production. See Cox, 397 S.W.2d at 203. Loyd is
correct that “[i]t is the same as if [BoMar] had been actually instructed by [Loyd] to
expend that much money for him.” Shaw, 299 S.W.2d at 313. This does not make Loyd
a consumer. Like parties to an operating agreement, who are not consumers under the
DTPA, Loyd simply reimbursed BoMar for certain costs incurred on his behalf. See
Hamilton, 648 S.W.2d at 322; see also Cox, 397 S.W.2d at 203. We cannot say that Loyd
was a consumer for purposes of the DTPA. We sustain issue two and need not address
BoMar Oil & Gas, Inc. v. Loyd Page 5 issues three, four, five, six, seven, or eight addressing the legal and factual sufficiency of
the evidence to support Loyd’s DTPA claim. See TEX. R. APP. P. 47.1.
LEGAL AND FACTUAL SUFFICIENCY
In several issues, BoMar challenges the legal and factual sufficiency of the
evidence to support the jury’s findings on Loyd’s other claims and award of damages.
Under legal sufficiency review, we ask “whether the evidence at trial would
enable reasonable and fair-minded people to reach the verdict under review” and credit
favorable evidence if reasonable jurors could, and disregard contrary evidence unless
reasonable jurors could not. City of Keller v. Wilson, 168 S.W.3d 802, 827 (Tex. 2005).
Under factual sufficiency review of issues where the appellant did not bear the
burden of proof, we “consider and weigh all of the evidence” and reverse only if the
verdict is “so contrary to the overwhelming weight of the evidence that the verdict is
clearly wrong and unjust.” Checker Bag Co. v. Washington, 27 S.W.3d 625, 633 (Tex.
App.—Waco 2000, pet. denied). On issues where the appellant bears the burden of
proof, we reverse only if, “considering all the evidence, the finding is so contrary to the
great weight and preponderance of the evidence as to be manifestly unjust.” Id.
Fraud
In issue nine, BoMar challenges the legal and factual sufficiency of the evidence
to support Loyd’s fraud claim, specifically the elements of reliance and injury.2
2 Fraud by affirmative misrepresentation arises where: (1) a material representation is made; (2) the representation was false; (3) the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the speaker intended that the other party should act upon it; (5) the party relied on the representation; and (6) the party thereby suffered injury. Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193, 211 n.45 (Tex. 2002). Fraud by nondisclosure arises where: (1) a party
BoMar Oil & Gas, Inc. v. Loyd Page 6 A plaintiff establishes reliance by showing the defendant’s acts and
representations induced him to either act or refrain from acting, to his detriment.
Marcontell v. Jacoby, 260 S.W.3d 686, 691 (Tex. App.—Dallas 2008, no pet.). For example,
in TCA Building Co. v. Entech, Inc., 86 S.W.3d 667 (Tex. App.—Austin 2002, no pet.), TCA
rejected an offer made in a release and supplement, but alleged fraud on the basis of
representations made therein. TCA, 86 S.W.3d at 674-75. The Austin Court held that
rejection of the offer was “inherently inconsistent with the reliance required for a fraud
action.” Id. at 675. A finding of reliance was precluded because “no dependence or
confidence is placed upon the representation as a basis for a claim of legal right.” Id.
Here, after numerous requests from Loyd, BoMar provided information
identifying expenses that it claimed were chargeable against Loyd’s interest. Upon
receipt of this information, Loyd immediately questioned numerous of these expenses
and requested additional information. He continued challenging BoMar’s information
and eventually expressed an unwillingness to pay certain expenses. At trial, Loyd
explained why he requested information from BoMar:
I just need the information that I -- I’m entitled to so I can make a determination as to what’s owed me and -- and what -- what the revenue is, what the arrangements are to sell the -- the products, the gas and the oil, and how the facilities are set up so I can determine what’s reasonable and not -- not reasonable, what costs are -- what the costs are, first and foremost, and then, second, what are reasonable and necessary costs.
conceals or fails to disclose a material fact within the knowledge of that party; (2) the party knows that the other party is ignorant of the fact and does not have an equal opportunity to discover the truth; (3) the party intends to induce the other party to take some action by concealing or failing to disclose the fact; and (4) the other party suffers injury as a result of acting without knowledge of the undisclosed fact. Bradford v. Vento, 48 S.W.3d 749, 754-55 (Tex. 2001). Reliance is an element of both. See Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 181 (Tex. 1997).
BoMar Oil & Gas, Inc. v. Loyd Page 7 Loyd explained that an accounting would enable him to determine whether costs are
reasonable and necessary in order to determine what amount he is owed and whether
he was underpaid due to improper charges.
As evidenced by his own testimony, Loyd did not rely on BoMar’s
representations. At no time before trial did Loyd accept the numbers provided by
BoMar or accept payment from BoMar. Rather, he was apparently suspicious of these
representations and sought to evaluate the accuracy of BoMar’s representations for
himself. He never placed any dependence or confidence upon BoMar’s representations.
See TCA, 86 S.W.3d at 675. Although the evidence certainly suggests that BoMar
intended that Loyd rely on its representations, we cannot say that the evidence is legally
and factually sufficient to show that Loyd actually relied on those representations. We
sustain issue nine.
In light of our finding that Loyd cannot prevail on his DTPA and fraud claims,
we need not address his tenth issue challenging the legal and factual sufficiency of the
evidence to support the jury’s award of $73,162 in damages for those claims. See TEX. R.
APP. P. 47.1.3
Accounting
In issue one, BoMar contends that the evidence is legally and factually
insufficient to support the jury’s finding that $72,162 in unreasonable and unnecessary
costs were charged against Loyd’s proportionate share of production.
3 The jury awarded $72,162 in damages for Loyd’s accounting claim, but also awarded $73,162 for fraud and/or DTPA. The jury charge does not indicate the specific claim on which the award was based. To avoid double recovery, the trial court awarded the $73,162. As previously discussed, Loyd’s DTPA and fraud claims fail; thus, he cannot recover the $73,162 in damages.
BoMar Oil & Gas, Inc. v. Loyd Page 8 A cotenant may “extract minerals from common property without first obtaining
the consent of his cotenants; however, he must account to them on the basis of the value
of any minerals taken, less the necessary and reasonable costs of production and marketing.”
Byrom v. Pendley, 717 S.W.2d 602, 605 (Tex. 1986) (emphasis added); see Cox, 397 S.W.2d
at 201. Loyd testified to several allegedly unnecessary and unreasonable costs deducted
from his share of production. BoMar challenges Loyd’s evidence regarding overhead,
supervision, and engineering fees, the well purchase, testing of the Pettit zone, and a
hydraulic fracture treatment performed in the Cotton Valley zone.
Overhead, Supervision, and Engineering Fees
Loyd, a petroleum engineer and operator, testified that overhead, supervision,
and engineering fees are unrelated to re-entering, producing, or marketing, but are costs
assumed by BoMar and its investors. He is not a party to a joint operating agreement
and did not agree to share in any of these costs. Moreover, Loyd testified that during
several months, BoMar charged the Dodge well $600 a month for overhead, but charged
nothing to another well, the Sneed. Relying on BoMar’s transaction report, he testified
to $3,000 in overhead fees at $600 per month for five months, $17,500 in supervision fees
at $700 per day for twenty-five days, and $1,200 in engineering fees.
Loyd’s expert witness, Edward Ziegler, testified that overhead represents
administrative fees, such as rent, telephones, employees, and costs of running the
business, that are chargeable by contract alone. He explained that these fees are listed
in an operating agreement. He testified that Loyd was entitled to $14,299 in
reimbursement for six and a half years worth of overhead charged since the Dodge
BoMar Oil & Gas, Inc. v. Loyd Page 9 began producing in January 2001. Taking into consideration that some supervision fees
might involve work performed on the well, Ziegler testified that Loyd should be
reimbursed $7,714 for supervision fees.
BoMar’s expert, Don Kirsch, testified that BoMar’s overhead fees are consistent
with industry practice, per the counsel for petroleum accountants. L.B. Preston,
BoMar’s president, testified that $600 a month for overhead is reasonable and necessary,
describing himself as “cheap” compared to amounts charged by other operators. He
admitted sometimes charging the Dodge and not the Sneed, but claimed that the two
are unrelated because the Sneed was not a good well, so he stopped charging overhead
in order to help investors. Preston further explained that supervision fees involve his
being on location each day making decisions and giving instructions. Engineering fees
involve evaluating the well bore, checking pressures, helping design fracture
treatments, contacting parties, and other engineering-type work.
On appeal, BoMar contends that Loyd’s and Ziegler’s testimony is conclusory
and speculative.4 Opinion testimony that is conclusory or speculative is not relevant
evidence, because it does not tend to make the existence of a material fact “more
probable or less probable.” Coastal Transp. Co. v. Crown Cent. Petroleum Corp., 136
S.W.3d 227, 232 (Tex. 2004). Expert testimony is considered “conclusory or speculative”
when it has no factual substantiation in the record. Beaumont v. Basham, 205 S.W.3d 608,
621 (Tex. App.—Waco 2006, pet. denied). Loyd and Ziegler both explained why
4 Loyd complains that BoMar fails to carry its appellate burden by neglecting to point the Court to places in the record showing conclusory or speculative testimony or explain what type of testimony would constitute probative evidence. However, BoMar cites to the record when referring to Loyd’s and Ziegler’s testimony and contends that the evidence is not supported by any basis or analysis.
BoMar Oil & Gas, Inc. v. Loyd Page 10 overhead, supervision, and engineering fees are not chargeable to an unleased mineral
interest owner. See Beaumont, 205 S.W.3d at 621. The testimony is neither conclusory
nor speculative.
BoMar further contends that overhead constitutes a chargeable production cost:
In the context of an oil and gas lease, the term “production” has been construed to mean a well which pays a profit, however small, over operating and marketing expenses, even though it may never repay its costs and the enterprise as a whole may prove unprofitable. This definition should apply equally to the phrase “producing in paying quantit[ies].” Operating and marketing expenses include taxes, overhead charges, labor, repairs, and depreciation on salvable equipment, but not costs or expenses in connection with the original drilling of the well or reworking expenses. Periodic cash expenditures incurred in the daily operation of a well (sometimes called out-of-pocket lifting expenses) are classified as operating expenses, while one-time investment expenses, such as drilling and equipping costs, are to be treated as capital expenditures. Reworking expenses are part of the capital investment.
Abraxas Petroleum Corp. v. Hornburg, 20 S.W.3d 741, 756 (Tex. App.—El Paso 2000, no
pet.) (emphasis added) (internal citations omitted); see United Cent. Oil Corp. v. Helm, 11
F.2d 760, 762 (5th Cir. 1926) (overhead charges should have been considered as part of
the expense of operating the well). BoMar suggests that overhead should likewise be
considered a reasonable cost of production when accounting to an unleased mineral
interest owner.5
5 BoMar also relies on Wagner & Brown, Ltd. v. Sheppard, 52 Tex. Sup. Ct. J. 130, 2008 Tex. LEXIS 1000 (Tex. Nov. 21, 2008), in which the Texas Supreme Court evaluated whether Wagner & Brown properly accounted to co-tenant Sheppard for both production and expenses on a unit basis:
The record reflects that these expenses were for landman fees, lease bonuses, recording fees, and title opinion expenses, part or all of which related to tracts in the unit other than Sheppard’s. Additionally, “overhead” expenses (including administration, supervision, office services, and warehousing) were calculated pursuant to a standard accounting agreement relating to the unit. At trial, Sheppard produced no evidence that any of these
BoMar Oil & Gas, Inc. v. Loyd Page 11 Loyd contends that a production-in-paying-quantities analysis should not apply
because it does not address allocation of expenses, involves a contractual relationship
usually allowing recovery of overhead charges, and focuses on when production
increases the lease term and post-completion costs. We disagree. Production of a well
involves actually taking oil or gas from the well in a captive state for either storing or
marketing the product for sale. Riley v. Meriwether, 780 S.W.2d 919, 923 (Tex. App.—El
Paso 1989, writ denied). “[T]he terms ‘produced’ and ‘produced in paying quantities’
mean substantially the same thing.” Clifton v. Koontz, 325 S.W.2d 684, 690 (Tex. 1959).
Abraxas’s definition of “operating and marketing expenses” guides our analysis of
which expenses are associated with the actual production from the well.
Citing Skelly Oil Co. v. Archer, 356 S.W.2d 774 (Tex. 1961) and Ladd Petroleum Corp.
v. Eagle Oil & Gas Co., 695 S.W.2d 99 (Tex. App.—Fort Worth 1985, writ ref’d n.r.e.),
Loyd further contends that the type of overhead charged by BoMar, i.e., administrative
overhead, is unreasonable and unnecessary, even under a production-in-paying-
quantities analysis, because it cannot be traced to actual production of the well:
As to the overhead charges, Mr. Cage in his address concludes that they are more difficult for the lessee to explain than depreciation. He concludes that those items of overhead charges which can be traceable to the actual expense of production of the well’s product for marketing
expenses were not reasonable and necessary; to the contrary, she stipulated that many of them were.
Wagner, 2008 Tex. LEXIS 1000, at *12-13. We do not find Wagner persuasive. Unlike Sheppard, Loyd presented evidence that overhead fees are unreasonable and unnecessary and did not stipulate to the contrary. Nor does the record indicate that overhead was calculated per any accounting agreement to which Loyd is a party.
BoMar Oil & Gas, Inc. v. Loyd Page 12 should be considered in determining whether or not the well is producing in paying quantities.
Skelly Oil, 356 S.W.2d at 781-82 (citing Edwin M. Cage, Production in Paying Quantities:
Technical Problems Involved, 10th ANNUAL INSTITUTE ON OIL AND GAS LAW AND TAXATION
61, 90 et seq. (1959)). The Court determined that overhead is a proper item for
determining whether a well is producing in paying quantities. See id.
However, in Ladd, the Fort Worth Court declined to follow Skelly Oil because it
did not directly address the issue of administrative and district expenses. See Ladd, 695
S.W.2d at 108-09. The Court held that these expenses should not be considered as
overhead because they continue whether or not the well is producing. Id. at 108.
“Ordinary business experience would indicate that as the elimination of a single well
would not materially reduce such expense, it should not be included as overhead.” Id.
Thus, the trial court erroneously overruled Ladd’s motions to exclude administrative
and district expenses from a determination of paying quantities. Id. at 109.
We agree that a distinction exists between overhead directly related to
production and that involving administrative expenses which continue whether or not
the well is producing. See Ladd, 695 S.W.2d at 108. The record does not indicate that
BoMar’s overhead fees are directly associated with production from the well. Ziegler’s
testimony demonstrates that these fees involve administrative expenses. BoMar did not
present evidence suggesting otherwise. The evidence is legally and factually sufficient
to support a finding that Loyd should not be charged with administrative overhead
expenses, engineering fees, or supervision fees in this case.
BoMar Oil & Gas, Inc. v. Loyd Page 13 Well Purchase
BoMar paid $45,000 for the Dodge and the Sneed. BoMar initially charged the
Dodge with the entire purchase, but later reimbursed Loyd $22,500, the portion
representing the cost of the Sneed. The bill of sale indicates that BoMar purchased the
well head tree with valves, casing, tubing, and a line heater.
Seeking reimbursement for his share of the Dodge purchase, Loyd testified that
unleased mineral interest owners are not responsible for expenses incurred before
reworking because these are “risk costs” incurred by the operator and are not
reasonable and necessary to re-work, produce, or market. He explained that reworking
begins when the rig is physically moved onto the hole and the operator begins the re-
entering process. Loyd admitted that purchase of a well head, casing, or tubing would
be a reasonable and necessary expense if the well was not already equipped with these
items. According to Ziegler, BoMar’s acquisition of equipment, such as the well bore, is
part of acquiring the lease interest.
Citing Burnham v. Hardy Oil Co., (Tex. Civ. App.—San Antonio 1912), aff’d, 195
S.W. 1139 (Tex. 1917), in which the San Antonio Court stated that necessary and
reasonable costs of production include the “cost of the machinery and appliances,”
BoMar contends that the equipment it purchased is a necessary and reasonable cost of
production. Burnham, 147 S.W. at 334. Loyd, however, contends that the purchase of
the well constitutes a pre-drilling cost for which he is not responsible.
Burnham does not address the distinction between original drilling and
reworking. The Texas Administrative Code defines “drilling” as “activities designed
BoMar Oil & Gas, Inc. v. Loyd Page 14 and conducted in an effort to obtain initial production from a well.” 31 TEX. ADMIN.
CODE § 9.31(b)(2) (2009) (emphasis added). “Reworking” constitutes “activities
designed and conducted on a well in an effort to restore or to enhance production in
paying quantities from an existing well.” Id. at § 9.31(b)(8) (emphasis added). Thus, in
the context of re-working, “drilling” involves the actual efforts to restore or enhance the
well. Purchase of the well head, casing, tubing, and line heater is an event that occurs
before the re-working phase begins. Moreover, in Abraxas, the Austin Court noted that
“one-time investment expenses, such as drilling and equipping costs, are to be treated
as capital expenditures” and are excluded from the definition of “marketing and
operating costs.” Abraxas, 20 S.W.3d at 756.
In fact, Kirsch testified that an unleased mineral interest owner does not put up
any money for the project or agree to take any risks. Preston testified that he and two
investors each paid $15,000 for the purchase of both wells. Two other partners paid a
total of $11,000. He and Kirsch both agreed that BoMar has recovered most of the
purchase price. BoMar’s purchase of the well equipment was a one-time investment
expense assumed by BoMar and excluded from the definition of “operating and
marketing expenses.” See Abraxas, 20 S.W.3d at 756. The evidence is legally and
factually sufficient to support a finding that purchase of equipment is an expense for
which an unleased mineral interest owner is not responsible.
Pettit Zone Workover
BoMar spent several thousand dollars testing the shallow Pettit zone before the
deeper Cotton Valley zone. Loyd testified that the deepest zone should be tested first
BoMar Oil & Gas, Inc. v. Loyd Page 15 because shallower zones involve substantially higher costs, given the need to also test
deeper zones, and the risk of losing the well bore. Loyd explained in detail that testing
shallow zones complicates well bore mechanics because of the need to squeeze off the
shallower zone after testing. Reviewing the well schematic, Loyd explained that the
Pettit had been tested in 1998 and found to be non-productive. He explained that the
prior operator properly tested the deeper zone first because of the minimal expense
involved compared to the expense of squeezing off a shallow zone. According to Loyd,
a conventional work-over would have cost about $5,000. He testified that $64,642 of the
testing was unnecessary and unreasonable, identifying the following expenses: (1) Pro
Perforating, L.L.C. for $1,536;6 (2) Reliance Well Service, Inc. for $401 and $1,645; (3)
Wireline, Inc. for $1,091; and (4) G & G Equipment Co., Inc. for $3,712 and $816.
Because BoMar had to drill out a bridge plug to get to Cotton Valley, Loyd did not
include this cost in his calculation.
Ziegler confirmed that the Pettit was tested in 1998 and found non-productive,
but admitted that this testing was done at slightly different depths than when tested by
BoMar. Ziegler further testified that BoMar tested the Pettit out of sequence, meaning
that operators typically start at the bottom of a well and work up. He testified that the
testing would not have been done had BoMar followed proper oilfield sequencing and
procedures. Ziegler opined that doing so delayed both payout and payment of
revenues. He further explained that BoMar purchased tubing around the time of the
6 Loyd testified to $1,836; however, this excluded a $300 discount applied if the bill were paid within thirty days. The discount was apparently applied, as evidenced by BoMar’s transaction report.
BoMar Oil & Gas, Inc. v. Loyd Page 16 testing. Assuming the tubing was purchased for the Pettit, the entire amount could be
credited as unnecessary and unreasonable. An invoice from Trident Steel Corp. shows
the cost of tubing as $12,873. After reviewing invoices and disregarding charges for
work that needed to be done, Ziegler identified $33,328 in improper charges for the
Pettit zone testing. He too omitted the cost of removing the bridge plug.
Preston testified that he had previously produced from a lower zone in the area,
which led him to test the Pettit to determine whether it could also produce. He
admitted that the Pettit was previously tested and found non-productive, but that
BoMar tested at a lower depth. Had he attempted Cotton Valley first, BoMar would not
have tried to perforate the Pettit at all, but would have had to squeeze off the Pettit
because of open perforations from prior testing.
Kirsch agreed that operators normally test the deepest zone first and admitted
that beginning in the shallowest zone is unusual, but not unheard of. He testified that
BoMar’s testing followed industry practice. He also testified that the testing was
reasonable, although at his deposition he stated that the techniques used were
reasonable, making no determination as to the reasonableness of the actual testing.
BoMar contends that Loyd’s testimony is conclusory on the issue of the Pettit
testing. However, Loyd explained why the testing was unreasonable and unnecessary,
taking into account proper expenses involving work that had to be completed even
without testing the Pettit first. See Beaumont, 205 S.W.3d at 621. Moreover, BoMar is not
entitled to recoup “expenditures [that] did not actually extend the leasehold estate,”
such as unsuccessful reworking operations. Shaw, 299 S.W.2d at 314; see Neeley v.
BoMar Oil & Gas, Inc. v. Loyd Page 17 Intercity Mgmt. Corp., 732 S.W.2d 644, 647 (Tex. App.—Corpus Christi 1987, no pet.)
(“Appellees were not entitled to recover for speculative efforts to preserve the common
estate, if unsuccessful.”); see also Willson v. Superior Oil Co., 274 S.W.2d 947, 950 (Tex.
Civ. App.—Texarkana 1954, writ ref’d n.r.e.) (“[I]f a co-tenant drills a dry hole, he does
so at his own risk and without right to reimbursement from his co-tenant (in the
absence of an agreement therefor) for the drilling costs.”). The evidence is legally and
factually sufficient to support a finding that this unleased mineral interest owner is not
responsible for the costs of unsuccessful testing.
Hydraulic Fracture Treatment in the Cotton Valley Zone
According to BoMar’s final statement for the Dodge and a handwritten invoice to
working interest owners, BoMar spent approximately $91,967 on a hydraulic fracture
treatment performed in Cotton Valley.
Loyd opined that BoMar prematurely conducted the fracture stimulation. He
explained that the fracture insignificantly increased production from 100 MCF per day
to 110 MCF per day. He admitted that the flow rate had continued to increase, but
testified that this would have occurred with natural clean-up of the well had BoMar
allowed the well time to clean-up and increase in flow on its own. Loyd testified that
the fracture neither increased the reserves, as the same amount of hydrocarbons would
ultimately be recovered, nor accelerated the pay-out date. Loyd testified that $82,656 of
the cost is unreasonable and unnecessary.
Ziegler testified that a portion of the fracture costs were unreasonable and
unnecessary. The well was swabbed several days in a row, the last two of which
BoMar Oil & Gas, Inc. v. Loyd Page 18 Ziegler opined were unnecessary because, other than a few barrels of liquid, all the
fluid had come out of the well. Also, BoMar purchased new tubing to complete the
string of existing tubing to reach the bottom of the well, but Ziegler testified that used
tubing could have been purchased at less expense. Ziegler further testified that the
fracture was too large and too costly because BoMar perforated the well with 30 holes
and used 120,000 pounds of sand total, when 2,000 pounds of sand per hole is
appropriate. Ziegler further opined that BoMar could have obtained a larger discount
than that received from Schlumberger, the company performing the treatment.
Whether the job was too large or BoMar could have obtained an additional fifteen
percent discount, $25,200 could have been saved. Ziegler opined that $35,087 of the
fracture charges were unnecessary and unreasonable. Alternatively, Ziegler testified
that the entire fracture treatment could be deemed unreasonable and unnecessary. He
admitted that wells in the area are often fractured, but explained that the fracture
treatment failed to create much of an increase in the flow rate. Thus, Loyd would be
entitled to $25,000 in reimbursement.
Kirsch testified that he is familiar with the practice of completing wells in Cotton
Valley and that he has never seen a well completed in Cotton Valley without a fracture.
He explained that existing tubing and casing can be used if it can withstand the
pressure. According to Kirsch, some cement plugs and a cast iron bridge plug had to be
drilled out to get to the Cotton Valley. Preston testified that he had fractured other
wells in the area. He explained that the tubing would have to withstand high pressures
BoMar Oil & Gas, Inc. v. Loyd Page 19 and he wanted “tubular integrity.” He explained that after about six months, the flow
had increased to more than 250 MCF per day.
BoMar contends that Loyd’s testimony is conclusory. We disagree. Loyd
explained that the fracture was performed prematurely because the flow rate could
have increased on its own without incurring the added expense of a fracture and that
the fracture was unnecessary because it failed to increase the flow rate. Even without
his testimony, Ziegler’s testimony supports these conclusions. The jury was entitled to
accept Loyd’s position that the fracture was unreasonable and unnecessary and reject
BoMar’s contrary position. See City of Keller, 168 S.W.3d at 819; see also Golden Eagle
Archery, Inc. v. Jackson, 116 S.W.3d 757, 761 (Tex. 2003); Hinkle v. Hinkle, 223 S.W.3d 773,
778 (Tex. App.—Dallas 2007, no pet.). The evidence is legally and factually sufficient to
support a finding that the hydraulic fracture treatment was an unnecessary and
unreasonable expense for which an unleased mineral interest owner is not responsible.
Damages
Having found that the above expenses are unreasonable and unnecessary, we
must now determine whether the evidence supports an award of $72,162 in damages
for these expenses. To be sufficient, the testimony “must be based on objective facts,
figures, or data from which the amount of lost profits may be ascertained” with
“reasonable certainty.” Szczepanik v. First S. Trust Co., 883 S.W.2d 648, 649 (Tex. 1994);
Paradigm Oil, Inc. v. Retamco Operating, Inc., 242 S.W.3d 67, 74 (Tex. App.—San Antonio
2007, pet. denied). Otherwise, it is speculative and conclusory and will not support a
judgment. Paradigm Oil, 242 S.W.3d at 74.
BoMar Oil & Gas, Inc. v. Loyd Page 20 We first note that there are several expenses to which Loyd and/or Ziegler
testified that BoMar does not challenge: (1) $200 for a drilling permit; (2) $30 for an
investor lunch; (3) $7,138 for landman fees; (4) $2,615 for various work done by B.D.
Dotson; and (5) $36,250 for attorney’s fees. These amounts are also supported by
documentary evidence. Loyd possesses a .3055555 interest, bringing his proportionate
share of these expenses to $14,127.
Of the disputed expenses, the record demonstrates that Loyd’s share of the
purchase price is $6,875 and $367 for engineering. These amounts are based on the
purchase and engineering costs identified in BoMar’s transaction report. As for
overhead, the jury could accept either Loyd’s testimony supporting $917 in
reimbursement for five months of overhead or Ziegler’s testimony supporting $14,299
in reimbursement for six and a half years of overhead. Ziegler’s testimony brings the
balance to $35,668.
As for the supervision fees, Loyd testified to $5,347 in reimbursement for twenty-
five days of supervision fees. This amount is based on the $17,500 identified in BoMar’s
transaction report. Ziegler testified that Loyd is entitled to $7,714 in reimbursement for
supervision fees, but did not explain how he reached this number and the record does
not so indicate. Taking the $5,347 identified by Loyd increases the balance to $41,015.
Loyd further testified that $64,642 of the Pettit testing was unnecessary and
unreasonable, but identified a mere $9,201 in specific expenses. Ziegler, however,
identified $33,328 in improper charges, entitling Loyd to $10,183. BoMar does not
challenge his testimony. Ziegler’s testimony brings the balance to $51,198.
BoMar Oil & Gas, Inc. v. Loyd Page 21 Finally, Loyd testified that $82,656 of the fracture treatment was unnecessary and
unreasonable. Again, he failed to explain how he formulated this number. Yet, BoMar
does not challenge Ziegler’s testimony identifying $35,087 in unreasonable and
unnecessary costs. This amount entitles Loyd to $10,721. However, Ziegler also
testified that Loyd would be entitled to $25,000 were the fracture deemed unnecessary
and unreasonable. Because the testimony is sufficient to allow the jury to conclude that
the entire cost of the fracture was unnecessary and unreasonable, Loyd’s share of this
cost brings the balance to $76,198. The jury’s award is, therefore, supported by the
evidence. We overrule issue one.
ATTORNEYS FEES
In issue eleven, BoMar contends that Loyd is not entitled to attorney’s fees.
“[A] prevailing party cannot recover attorney’s fees from an opposing party
unless permitted by statute or a contract between the parties.” Holland v. Wal-Mart
Stores, Inc., 1 S.W.3d 91, 95 (Tex. 1999). There is no contract between BoMar and Loyd.
Because Loyd is not a consumer under the DTPA, he cannot recover attorney’s fees
under that statute. See Parkway Co. v. Woodruff, 901 S.W.2d 434, 441 (Tex. 1995) (“In the
absence of recovery under the DTPA, there is no basis for the recovery of attorney’s fees
in this case.”). Loyd alleged no other statutory claim that would entitle him to
attorney’s fees.7 We sustain issue eleven.
7 BoMar points out that Loyd could recover attorney’s fees under the Natural Resources Code, but Loyd did not bring such a claim. See TEX. NAT. RES. CODE ANN. § 91.402 (Vernon Supp. 2008) (timely payment of oil and gas proceeds); see also TEX. NAT. RES. CODE ANN. § 91.404 (Vernon 2001) (non-payment of oil and gas proceeds); TEX. NAT. RES. CODE ANN. § 91.406 (Vernon 2001) (attorney’s fees).
BoMar Oil & Gas, Inc. v. Loyd Page 22 EXEMPLARY DAMAGES
In issue twelve, BoMar contends that Loyd is not entitled to statutory or
exemplary damages. The jury awarded $100,000 in exemplary damages for fraud and
$200,000 for DTPA. Because Loyd’s DTPA and fraud claims are unsupported by the
evidence, he is not entitled to exemplary damages. See Twin City Fire Ins. Co. v. Davis,
904 S.W.2d 663, 665 (Tex. 1995) (“[R]ecovery of punitive damages requires a finding of
an independent tort with accompanying actual damages.”). We sustain issue twelve.
INTEREST
In issue thirteen, BoMar argues that Loyd is not entitled to prejudgment interest.
“[A] prevailing plaintiff may recover prejudgment interest on damages that have
accrued by the time of the judgment.” Matthews v. DeSoto, 721 S.W.2d 286, 287 (Tex.
1986). There are two legal sources for an award of prejudgment interest: (1) general
principles of equity; and (2) an enabling statute. Johnson & Higgins of Tex., Inc. v.
Kenneco Energy, Inc., 962 S.W.2d 507, 528 (Tex. 1998). Loyd contends that he is entitled
to prejudgment interest as the prevailing party recovering a money judgment. Citing
Concord Oil Co. v. Pennzoil Exploration & Prod. Co., 966 S.W.2d 451 (Tex. 1998), BoMar
contends that equitable prejudgment interest cannot be awarded when the Natural
Resources Code applies.
Section 91.402 of the Natural Resources Code provides that oil and gas payments
may be withheld without interest beyond the time limits prescribed in section 91.402(a)
if there is a dispute concerning title that would affect distribution of payments. TEX.
NAT. RES. CODE ANN. § 91.402(b)(1) (Vernon Supp. 2008). If payments are withheld or
BoMar Oil & Gas, Inc. v. Loyd Page 23 suspended in accordance with section 91.402(b), the Payor is not required to pay
interest on the late payments. TEX. NAT. RES. CODE ANN. § 91.403(b) (Vernon 2001). In
Concord Oil, the Texas Supreme Court stated, “The Legislature has indicated very
clearly in the Natural Resources Code that prejudgment interest is not due when
disputes exist between a ‘payor’ and a ‘payee’ over oil and gas titles.” Concord Oil, 966
S.W.2d at 463. Thus, “an award of equitable prejudgment interest would be directly at
odds with [section 91.402].” Id. at 462; see Gore Oil Co. v. Roosth, 158 S.W.3d
596, 602 (Tex. App.—Eastland 2005, no pet.) (“A title dispute clearly existed in this case,
and prejudgment interest was not authorized.”).
Before suit was filed, BoMar and Loyd disagreed about the amount of Loyd’s
interest, Loyd claiming that he had a .401873 interest rather than a .3055555 interest. As
a result, BoMar suspended payments. After suit was filed, Loyd stipulated to an
amount of interest in order to receive payments from BoMar and admitted at trial that
his interest is .3055555, as BoMar had originally suggested. At a hearing on Loyd’s
motion to enter judgment, Loyd’s counsel informed the trial court that Loyd did not
allege a claim under the Natural Resources Code.
It is apparent that section 91.402 applies in this case, given the dispute over title.
Loyd was not entitled to interest either equitably or statutorily. See Concord Oil, 966
S.W.2d at 463; see also Gore Oil, 158 S.W.3d at 602. We sustain issue thirteen.
CONCLUSION
Having found that Loyd cannot prevail on his claims for DTPA violations, fraud,
and prejudgment interest, we modify the judgment to delete the awards of $61,823 in
BoMar Oil & Gas, Inc. v. Loyd Page 24 attorney’s fees, $200,000 in exemplary damages for the DTPA claim, $100,000 in
exemplary damages for the fraud claim, and $19,779.36 in prejudgment interest. We
further modify the judgment to reduce the award of $73,162 in actual damages to
$72,162. The judgment is affirmed as modified.
FELIPE REYNA Justice Before Chief Justice Gray, Justice Reyna, and Justice Davis (Chief Justice Gray concurring and dissenting with note)* Affirmed as modified Opinion delivered and filed July 15, 2009 [CV06]
* (Chief Justice Gray does not join the Court’s opinion. A separate opinion will not issue. He notes that notwithstanding the discussion under the heading “INTEREST” in the Court’s opinion, it is clear from the remainder of the opinion that this dispute was not about title. This dispute was about what expenses could properly be charged against an unleased mineral owner’s share of production. There has not been a dispute about title since September 13, 2004. Therefore, because Section 91.402 of the Natural Resources Code is not applicable to the dispute since that date, it does not give BoMar a right to not pay what BoMar agreed it owed Loyd and because BoMar paid nothing to Loyd, it now owes Loyd prejudgment interest. There is absolutely no part or portion of the trial court’s or this Court’s judgment that addresses or purports to resolve a title dispute because that issue was taken out of the case by Loyd’s stipulation. Because the Court deprives Loyd of all prejudgment interest, I respectfully dissent to that portion of the judgment and concur only in the remainder of the judgment of the Court.)
BoMar Oil & Gas, Inc. v. Loyd Page 25