Wolf Hollow I, L.P. v. El Paso Marketing, L.P. and Enterprise Texas Pipeline, LLC

• Court: Court of Appeals of Texas
• Decided: March 23, 2015
• Docket: 14-09-00118-CV
• Status: Published

Opinion

ACCEPTED 14-09-00118-CV FOURTEENTH COURT OF APPEALS HOUSTON, TEXAS 3/23/2015 7:24:36 PM CHRISTOPHER PRINE CLERK

IN THE COURT OF APPEALS FOR THE FOURTEENTH DISTRICT OF TEXAS HOUSTON FILED IN 14th COURT OF APPEALS __________________________________________________________________ HOUSTON, TEXAS 3/23/2015 7:24:36 PM Appeal No. 14-09-00118-CV CHRISTOPHER A. PRINE Clerk __________________________________________________________________

WOLF HOLLOW I, L.P.

Appellant,

v.

EL PASO MARKETING, L.P. and ENTERPRISE TEXAS PIPELINE, LLC.

Appellees.

On Remand from the Supreme Court of Texas __________________________________________________________________

WOLF HOLLOW’S SUPPLEMENTAL REPLY BRIEF ON REMAND __________________________________________________________________ Respectfully submitted,

MCGUIREWOODS LLP

Jacks C. Nickens State Bar No. 15013800 600 Travis Street, Suite 7500 Houston, Texas 77002 (713) 353-6668 (832) 214-9931 Fax Email: jnickens@mcguirewoods.com ATTORNEYS FOR APPELLANT

ORAL ARGUMENT REQUESTED IDENTITY OF PARTIES AND THEIR COUNSEL

Appellant: Trial and Appeal Counsel for Appellant: Wolf Hollow I, L.P. Jacks C. Nickens State Bar No. 15013800 McGuireWoods LLP 600 Travis Street, Suite 7500 Houston, Texas 77002 (713) 353-6668 (832) 214-9931 Fax

Appellees: Trial and Appeal Counsel for Appellees: El Paso Marketing, L.P. D. Mitchell McFarland State Bar No. 13597700 Munsch Hardt Kopf & Harr, PC 700 Milam Street, Suite 2700 Houston, Texas 77002 (713) 222-4041 (713) 222-5894 Fax

Enterprise Texas Pipeline, LLC Michael Hendryx State Bar. No. 09461200 Suzanne R. Chauvin State Bar No. 04160600 M. Chad Gerke State Bar No. 24027390 Strong Pipkin Bissell & Ledyard, L.L.P. 1301 McKinney, Ste. 2100 Houston, TX 77010 (713) 210-4377 (713) 651-1920 Fax

i TABLE OF CONTENTS

IDENTITY OF PARTIES AND COUNSEL .............................................................i

TABLE OF CONTENTS .......................................................................................... ii

TABLE OF AUTHORITIES ................................................................................... iii

INTRODUCTORY STATEMENT OF ISSUES....................................................... 1

I. The Supply Agreement Does NOT Bar Wolf Hollow’s Damage Claims ................................................................................................3

II. Section 21.1 Applies to Gas Quality Claims ................................................... 6

III. El Paso Breached Its Duties Under Article V of the Supply Agreement ........ 9

CONCLUSION ........................................................................................................10

ii TABLE OF AUTHORITIES

Cases

Wolf Hollow I, L.P. v. El Paso Marketing, L.P. (Wolf Hollow II), 383 S.W.3d 138 (Tex. 2012) ............................................................ 2, 3, 4, 7

Wolf Hollow I, L.P. v. El Paso Marketing, L.P. (Wolf Hollow III), 409 S.W.3d 879 (Tex. App.–Houston [14th Dist.] 2013, pet. pending) ................................................................................... 5, 9

Wolf Hollow I, L.P. v. El Paso Marketing, L.P. (Wolf Hollow IV), 450 S.W.3d 121, 58 Tex. Sup. Ct. J. 108 (Tex. 2014) ........................... 5, 9

iii IN THE COURT OF APPEALS FOR THE FOURTEENTH DISTRICT OF TEXAS HOUSTON __________________________________________________________________

Appeal No. 14-09-00118-CV __________________________________________________________________

On Remand from the Supreme Court of Texas _________________________________________________________________

WOLF HOLLOW’S SUPPLEMENTAL REPLY BRIEF ON REMAND __________________________________________________________________

TO THE HONORABLE COURT OF APPEALS:

INTRODUCTORY STATEMENT OF ISSUES

Even after years of appellate review, Wolf Hollow’s remaining arguments

and El Paso’s defenses bear repeating. El Paso breached the Supply Agreement by

delivering contaminated gas to Wolf Hollow’s plant, in violation of the pipeline

1 Tariff standards of quality. 1 Such deliveries were a breach of the provisions of

Article V’s fuel management services as well as the quality provisions of Article

XIV. 2 The breaches caused Wolf Hollow to shut down the plant and necessitated

the purchase of replacement power as “cover.” The Supply Agreement and the

general law of contracts provide remedies for El Paso’s breach. El Paso concedes

that Article XXI, entitled Default and Remedies, is not subject to Section 24.11’s

provision on consequential damages, at least in part. Section 21.1 provides a

process for a replacement power remedy. There is “evidence,” the Supreme Court

has concluded, that Wolf Hollow complied with that process. Wolf Hollow II at

145. Section 1.1’s definition of “Cover Standard” for a “delivery failure” similarly

relates to replacement power claims. Article XIV defines a quality failure as a

delivery failure. Section 21.2 defines a delivery failure, including under Article

XIV, as an “Event of Default.” Section 21.3 provides remedies for events of

default, including replacement power under section 21.1, the cover standard, and

general contract principles.

El Paso’s defenses to its breach were or are: 1) Article XIV provides an

exclusive remedy for quality breaches; 2) replacement power damages are

1 The Court’s review is of the trial court’s granting of summary judgment. Disputed facts are subject to proof at trial on remand but for appellate purposes are accepted. 2 The Court reviews legal conclusions de novo. Wolf Hollow adopts and incorporates its prior briefs, including the defined terms used in previous filings.

2 consequential damages barred by the Supply Agreement unless permitted under

Section 21.1; and 3) Section 21.1 does not apply to quality claims. El Paso lost its

exclusive remedy argument and at least part of its consequential damages argument

in the Texas Supreme Court. The matter now before this Court is the applicability

of Article XXI to Wolf Hollow’s gas quality claims. 3

I. The Supply Agreement Does NOT Bar Wolf Hollow’s Damage Claims.

El Paso begins its Supplemental Brief with the bold claim that the

“following points cannot be disputed.” (El Paso’s Brief I at 1) Then, in the same

paragraph, El Paso asserts the erroneous and disputed claim that the Supreme

Court affirmed that “all of Wolf Hollow’s damage claims for property damage and

replacement power were claims barred under the Agreement.” 4 [Emphasis added.]

The Supreme Court did not hold that the Supply Agreement barred Wolf Hollow’s

claims for replacement power. To the contrary, the Court held that Wolf Hollow’s

replacement power claims were NOT barred under the Agreement. Wolf Hollow II

at 145. Furthermore, the Court held there was “evidence” that Wolf Hollow

complied, as best it could under the circumstances, under Section 21.1 (c) of the

Supply Agreement. Specifically, the Court stated, “We thus conclude there is

evidence Wolf Hollow is entitled to recover replacement-power damages under

3 Technically, the Court is reviewing Declaration 4 of the trial court’s Final Judgment in granting El Paso’s motion for Summary Judgment. 4 El Paso repeats the error later in its Supplemental Brief. Id. at 9.

3 Section 21.1 (c), precluding summary judgment against Wolf Hollow based on the

consequential damages waiver.” Id. The issue before the Court generally is not

consequential damages. The issue is the applicability of Article XXI to gas quality

claims.

El Paso has previously conceded that Article XXI is not subject to Section

24.11’s limitations.5 But, El Paso now argues that only Section 21.1 is excluded

from the consequential damages waiver, not all of Article XXI, as El Paso

previously stated. (El Paso’s Brief I at 9, 19.) There is no basis in the language of

the Supply Agreement for El Paso’s extension of the waiver. El Paso cites none

and offers no supporting argument. If the consequential damages exception

applies to Section 21.1, it applies to all of Article XXI. In addition, El Paso’s

sought a “clarification” in its Motion for Rehearing that the Supreme Court did not

intend “its holding to extend to replacement power purchased by Wolf Hollow

during the period of time the plant was out of service for repairs.” [Emphasis

added.] (El Paso’s Motion for Rehearing I at 2.) The Court denied the Motion

without comment. With regard to Section 14.1, the Court noted that El Paso

moved for rehearing, “arguing that “[t]he Court incorrectly construes El Paso’s

obligation under Section 14.1 of the Supply Agreement as to gas quality,” but we

5 “Article XXI provides an exception to Section 24.11 for deficiencies in gas quantity.” El Paso’s Brief I at 15. Also, see El Paso Brief on the Merits I in Wolf Hollow II (June 27, 2011 at 15). Citations and excerpts from the cited pleadings are reproduced in the Appendix.

4 denied the motion. [Emphasis added.] Wolf Hollow IV, n 1. The Court thus gave

significance to arguments denied in the motion for rehearing. Judge Busby also

found significance in the Supreme Court’s denial of El Paso’s motion for

rehearing. Wolf Hollow III at 893.

El Paso’s new argument ignores Section 21.3 which incorporates Section

21.1, meaning that all replacement power claims, including those under Article

1.1’s definition of cover standard, are not subject to the consequential damages bar

if Section 21.1 or the definition of cover applies. El Paso also overlooks Section

24.11(b). CR 548-49. There the Supply Agreement states that damages under

Section 21.1 and 21.3 are capped at $26 Million. Wolf Hollow’s claims are well

within this cap. The structure of Section 24.11 offers an additional argument that

damages under Section 21.1 (which deals only with replacement power) and

Section 21.3 are not barred; they are capped.

Even if one accepts El Paso’s more restricted concession, El Paso’s position

has been that Section 21.1 does not apply to quality claims, or the provisions of

Section 21.1 (c) were not followed, or Section 21.1 does not apply to gas delivered

and accepted, or Section 21.1 is not applicable when the plant is shut down. El

Paso repeats these arguments in its Supplemental Brief at 9 to 16. Wolf Hollow

addresses each of these familiar El Paso arguments below, but one starts the

5 analysis with El Paso’s concession that replacement power is not barred by the

consequential damages provision.

II. Section 21.1 Applies to Gas Quality Claims.

For the reasons stated in Wolf Hollow’s Supplemental Brief, no doubt

should remain that Article XXI provides remedies for Wolf Hollow’s quality

claims. Article XIV expressly references Article XXI and replacement power. It

“deems” a quality failure as a “delivery failure” under Article XXI. Article XXI

provides a remedy for Article XIV gas quality delivery failures. 6 Conversely,

Section 21.2 makes uncured delivery failures under Article XIV (and any other

breach of a material provision in the Supply Agreement) an event of default. And

Section 21.3 provides a panoply of remedies, including replacement power under

Section 21.1, for an event of default. Except for a few paragraphs toward the end

of its Supplemental Brief, El Paso ignores these contentions. (El Paso

Supplemental Brief at 16 – 17).

Instead, El Paso reasserts its arguments listed above, each of which fails.

The first of El Paso’s arguments is that the procedures of Section 21.1 (c) were not

followed. El Paso’s position runs afoul of the Supreme Court’s finding there was

“evidence” that Wolf Hollow invoked and complied with these procedures for 6 El Paso stated that “If Wolf Hollow rejects gas on the LSR pipeline as not meeting quality specifications, by the language of Article XIV, that action would be deemed a failure to deliver and Article XXI would apply.” El Paso’s Motion for Rehearing II at 11, n. 6. El Paso offers no argument to differentiate deliveries on the EPGT pipeline other than its failed exclusive remedy argument. 6 making replacement power claims, which makes the granting of summary

judgment improper. Wolf Hollow II at 145.

El Paso offers a couplet of unsupported contractual arguments about Section

21.1 that together end in a nonsensical result. First, El Paso argues that Section

21.1 does not apply to gas “delivered and accepted.” If El Paso delivers

contaminated gas that shuts the plant down, El Paso claims there is no replacement

power remedy. On the other hand, El Paso also claims that Section 21.1 does not

apply when the plant is shut down for repairs. Together, El Paso’s arguments

mean that Section 21.1 does not apply if gas is delivered or not delivered. Under

El Paso’s scheme, replacement power is available only if Wolf Hollow schedules

the delivery of gas and then refuses the delivery before it can be delivered. This is

nonsense. The gas is delivered in huge quantities at very high pressures.

“Refusal” under the circumstances El Paso posits is a practical impossibility. El

Paso never gave Wolf Hollow notice it was delivering contaminated gas. The

replacement power remedy is needed precisely when the plant is not producing

power (i.e., “shut down”). However, El Paso argues these sophisticated parties

agreed this is precisely when replacement power is not available. The Supreme

Court rejected this argument: “[R]eplacement gas could not avoid a plant

shutdown that had already occurred or remedy the power shortage to Wolf

Hollow’s customers. Only replacement power could remedy that shortage.” Id.

7 Also, see El Paso’s statement cited at page 4, supra, re El Paso’s motion for

rehearing in the Supreme Court. El Paso’s Motion for Rehearing I. The situation

at hand is one where Wolf Hollow “refused” the gas from El Paso after

“accepting” gas that shut the plant down.

El Paso relies on the absence of the word “quality” from Section 21.1 while

ignoring that Article XIV expressly refers to Article XXI and its remedies. The

true magic words which appear in both are “delivery failure.” Wolf Hollow may

refuse to accept gas that does not meet quality specifications, and such refused gas

“shall be deemed a failure…to deliver such Quantity of Gas in accordance with the

terms of this Agreement, with EPME’s liability for such failure determined in

accordance with Article XXI hereof.” This provision relates to the alternate gas

delivery portal but is equally applicable to the EPGT point of delivery because the

remedy there is not exclusive. The simple and unexceptional fact is that delivering

gas that does not meet the Transporter’s Tariff Standards is a “delivery failure” for

which Article XXI remedies apply.

El Paso similarly ignores Section 21.2 (v) which provides that an uncured

failure to perform any material provision of the Agreement is an event of default,

and Section 21.3 provides that “the Party not in default shall have the right to

pursue any other remedy under this Agreement…..” Section 21.1 is a remedy under

8 the Agreement for replacement power that El Paso admits is not subject the

consequential damages waiver. El Paso does not address Wolf Hollow’s argument.

El Paso dismisses Wolf Hollow’s contention that quality and quantity are

interrelated as “unrelated to the issue at hand.” (El Paso’s Supplemental Brief at

14.) But the issue is whether Article XXI applies to Wolf Hollow’s quality claim.

The fact that gas quality is definitionally and operationally interrelated to gas

quantity is directly related to this issue, and El Paso concedes there is a fact issue

of whether the contaminated gas met Tariff specifications.

Finally, El Paso relies on Judge Busby’s concurring opinion in Wolf Hollow

III. Wolf Hollow addresses this point in its Supplemental Brief at 15-16. Judge

Busby’s opinion was based on an understandable misreading of Wolf Hollow’s

pleading.

III. El Paso Breached Its Duties Under Article V of the Supply Agreement.

This Court and the Supreme Court have concluded that Wolf Hollow has

alleged and provided evidence of El Paso’s breach of its fuel management

obligations under Article V of the Supply Agreement. Wolf Hollow III at 889-90;

Wolf Hollow IV at n.2. The remaining question under Article V is whether the

Supply Agreement provides a remedy. With regard to that question, the Supreme

Court noted that Wolf Hollow’s replacement power damages for breach of Article

9 V are not barred “if it can establish replacement power damages.” Wolf Hollow IV

at n. 2.

CONCLUSION

This case demands a fully developed trial record. Wolf Hollow asks that the

Court remand for trial on the issue of replacement power damages for El Paso’s

delivery of contaminated gas to Wolf Hollow’s plant.

Respectfully submitted,

/s/ Jacks C. Nickens Jacks C. Nickens State Bar No. 15013800 600 Travis Street, Suite 7500 Houston, Texas 77002 (713) 353-6668 (832) 214-9931 Fax

ATTORNEYS FOR APPELLANT

CERTIFICATE OF COMPLIANCE

The undersigned counsel hereby certifies that the word count in this document is 1,849, in compliance with Texas Rules of Appellate Procedure 9.4.

/s/ Jacks C. Nickens Jacks C. Nickens

10 CERTIFICATE OF SERVICE

As required by Texas Rule of Appellate Procedure 6.3 and 9.5(b), (d), (e), I certify that I have served this document on all other parties which are listed below via email and U.S. first-class mail on the 23rd day of March, 2015:

Via email mmcfarland@munsch.com And U.S. First-Class Mail D. Mitchell McFarland Munsch Hardt Kopf & Harr, PC 700 Milam Street, Suite 2700 Houston, TX 77002

/s/ Jacks C. Nickens Jacks C. Nickens 65547180_1.docx