Co-author Gunner West

Last year we reported on Steelhead Midstream Partners, LLC v. CL III Funding Holding Company, LLC, where the Texas Supreme Court held that a pipeline owner’s breach-of-contract claim was not an impermissible collateral attack on a foreclosure judgment. The case went back to the Fort Worth Court of Appeals for a decision on the merits. That decision is now in.

On remand in CL III Funding Holding Company, LLC v. Steelhead Midstream Partners, LLC, the Court of Appeals reversed the trial court’s $2 million judgment and rendered a take-nothing judgment against Steelhead.

The facts

CL III owned an interest in a pipeline and related oil and gas interests and entered into a joint operating agreement with Steelhead to govern operations and accounting for revenues and expenses.

Steelhead alleged CL III violated the JOA by failing to pay a pre-existing lien debt and by suing for foreclosure on the lien, which CL III had acquired by assignment.

The Court here framed the case narrowly: Did the JOA either:

  • require CL III to proactively calculate and pay its share of the lien without receiving a bill from Steelhead, or
  • prohibit CL III from acquiring, holding, or foreclosing on a preexisting third-party lien?

The Court answered “no” to both questions. Under the JOA’s plain language there was no such requirement or prohibition.

No invoice = no breach

The JOA incorporated a COPAS Accounting Procedures, the industry-standard framework for addressing joint account expenses. Under those procedures, the operator invoices owners monthly and owners must pay within 30 days of receipt.

Steelhead never billed CL III for the pre-existing lien. The Court held that without an invoice, CL III’s payment obligation was never “triggered.” The Texas Supreme Court has held that under similar COPAS procedures a non-operator’s payment obligation is not triggered until the operator sends a joint interest billing.

The Court rejected Steelhead’s argument that no invoice was required because revenues from operations consistently covered expenses. Steelhead used self-defeating logic: If the lien was a “contingent liability” that couldn’t be invoiced until the foreclosure judgment, then it wasn’t a JOA expense during CL III’s ownership. And if Steelhead could have invoiced it anyway, then Steelhead can’t blame CL III for Steelhead’s decision not to do so.

Acquiring or foreclosing on liens not prohibited

Steelhead also argued that CL III breached the JOA by acquiring and foreclosing on a lien that wasn’t a “Permitted Lien.” The court rejected this on several grounds.

  • “Permitted Liens” was a defined term under the JOA that imposes a duty on the operator to keep the property free from non-permitted liens. Nothing in the JOA prohibited owners from acquiring liens. The court noted, “A defined term is not a contractual prohibition.”
  • The JOA provision for “several, not joint” liability addressed debts arising “hereunder”, that is, the JOA. The lien was a preexisting encumbrance based on obligations to the construction company—not a JOA expense.
  • The JOA’s good-faith provision didn’t create a standalone duty. The court observed that a contractual good-faith provision is merely a “lens” through which other contract requirements must be viewed; it doesn’t create independent obligations.

The court emphasized that the JOA contemplated foreclosures between owners in certain contexts. Had the parties intended to prohibit all foreclosure actions against one another, they could have said so. They did not, and courts “will not squint to discover requirements [or prohibitions] that the parties themselves chose not to write into the memorialization of their bargain.”

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