Kachina Pipeline Co., Inc., v. Lillis
No. 13-0596
Case Summary written by Frederick C. Hutterer, Staff Member.
JUSTICE BROWN delivered the opinion of the Court, in which JUSTICE JOHNSON, JUSTICE WILLET, JUSTICE GUZMAN, JUSTICE LEHRMANN, and JUSTICE BOYD joined.
Kachina Pipeline Company, Inc. (Kachina) purchased natural gas from Michael Lillis to resell to Davis Gas Processing (Davis). Kachina installed a compression system, which permitted it to transfer gas to Davis via a high-pressure inlet. In order to successfully transfer gas to Kachina, a producer’s compression system had to have sufficient pressure to overcome the working pressure of Kachina’s system.
Kachina and Lillis entered into a five-year gas purchase agreement in 2005, in which Lillis would provide Kachina with gas, and Kachina would pay Lillis a portion of resale proceeds obtained from Davis. At the end of the five-year period, Kachina had the option to purchase gas from month to month. The agreement stated that “[i]f Buyer installs compression to effect delivery of Seller’s gas, Buyer will deduct from proceeds payable to Seller hereunder a value equal to Buyer’s actual costs to install, repair, maintain, and operate compression . . . .” There was also an option requiring that Lillis notify Kachina of third party purchase offers, granting Kachina the option to “continue the purchase of gas under the terms of this Agreement” from Lillis with price adjustments allowing Lillis to receive the same benefit as the third-party offer. Lillis entered into a gas purchase agreement with Davis in 2008.
Lillis sued, arguing that Kachina breached the gas purchase agreement. Lillis claimed that the agreement did not allow for compression taking place after the gas was transferred to be deducted from his proceeds. Kachina counterclaimed, stating that Lillis’s failure to notify them of his new agreement with Davis constituted a breach of the original purchase agreement. Both parties sought summary judgment.
The trial court granted Kachina’s motions for summary judgment, asserting that Kachina had the right to deduct and that Kachina exercised an option to extend the contract termination date to May of 2015. The court of appeals reversed, holding that the Agreement did not permit the deduction of compression costs. It also held that the option did not provide for a five-year extension.
Issue: Whether the compression cost provision of the agreement applied to compression occurring after Lillis delivered gas to Kachina and whether the option supported a five-year contract extension.
The Supreme Court of Texas held that the agreement only permitted Kachina to deduct the costs of compression installed during the contract term if additional systems were necessary to compensate for the working pressure of Kachina’s compression system. Additionally, the Court held that the option did not permit a five-year extension, thereby affirming the court of appeals’ decision that the deduction of compression costs and a five-year extension were inappropriate.
As to the first issue, the court reasoned that under the section of the agreement providing for the deduction of compression costs, Lillis had the duty to overcome Kachina’s working pressure. In the case that a producer failed to provide sufficient pressure, the agreement permitted Kachina to either do nothing or install additional compression and deduct costs from Lillis. The Court asserted that the right to deduct compression costs was contingent upon Kachina’s elective installation of additional compression. Notably, the agreement did not apply to preexisting compression because it would be unreasonable for the parties to intend for the provision to apply to compression already in place. Kachina argued that “deliver” referred to final delivery to Davis, but the Court rejected this reasoning because the Agreement repeatedly used “delivery” to reference transfers from Lillis to Kachina. Additionally, there was no evidence that Kachina’s systems were under-pressurized because the record established that compression was not necessary to effectuate gas flow from Kachina to Davis. Lastly, Kachina argued that Lillis acquiesced to compression costs due to the deduction of costs from a prior contract between the two. The Court concluded that evidence of Lillis’s subjective intent under a prior contract could not be considered to interpret the agreement’s unambiguous meaning.
As to the final issue, the Court reasoned that the language of the Agreement did not support a five-year extension because it only permitted Kachina to continue to purchase gas pursuant to the contract terms. Kachina argued that the five-year period was a term under the Agreement. The Court stated that another term of the Agreement was that it would continue month-to-month, not that the parties would be subjected to an additional five-year term. Kachina also claimed that the market price of gas changes, necessitating a new five-year period to enable Lillis to receive the same economic benefit as he would have with Davis. The Court asserted that the language of the agreement still did not support a new five-year term, and that a month-to-month term would protect Lillis’s interests by permitting him to engage in a more lucrative outside deal. Lastly, Kachina claimed that the Court’s interpretation would result in absurdity, as it would have to exercise its option every month. The Court responded that a month-to-month term allowed Lillis to acquire a better deal and that Kachina could have contracted for a longer Agreement if the economics required it.
In this case, the Court held that Kachina could not deduct compression costs from Lillis’s proceeds and that the agreement did not provide for a five-year extension. The Court affirmed the court of appeals’ judgment and remanded the case to the trial court for determination of accounting and costs and fees.
CHIEF JUSTICE HECHT, joined by JUSTICE GREEN and JUSTICE DEVINE, concurring in part and dissenting in part.
Chief Justice Hecht concurred with regard to the Court’s judgment regarding the five-year extension but dissented with the Court’s conclusion that Lillis was not obligated to pay for preexisting compression. The dissent argued that the Court simply speculated that no compression was needed to transfer gas from Lillis to Kachina. The dissent also stated that it would not make sense for Lillis to stop paying for compression installed during his prior contract with Kachina, only to pay for newly installed compression under the new agreement. In the dissent’s opinion, Lillis avoided paying for compression as was his obligation pursuant to the Agreement, while Kachina did not have the right to extend the agreement by five-years.