S & J Investments v. American Star Energy and Minerals Corporation

Citation: Not availableDocket: 07-99-00090-CV

Court: Court of Appeals of Texas; November 6, 2001; Texas; State Appellate Court

Original Court Document: View Document

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S. J. Investments (S. J) appeals a final judgment from the 84th District Court of Hutchinson County in favor of American Star Energy and Minerals Corporation (American). S. J raises eleven issues, contending the trial court erred by granting American a partial summary judgment related to joint interest billing, issuing an instructed verdict on fraud and related claims, and entering judgment based on jury findings regarding attorney's fees and pre-judgment interest. This case arises from the "Bearkiller" oil and gas lease, where S. J, a non-operating interest owner, stopped paying its share of operating expenses in August 1990, prompting American to file suit. S. J counterclaimed for various breaches and alleged misconduct. The trial court granted partial summary judgment to American on S. J's claims of breach of good faith and usury, and awarded American $34,241.32 for uncontested expenses. The jury trial led to a directed verdict for American on fraud and willful misconduct but left the question of compound interest and attorney's fees for the jury, which ruled in favor of American. The appellate court affirms the trial court's decision regarding the duty of good faith and fair dealing, concluding that no such duty exists under the operating agreement.

S. J argued that American could not enforce the contract provision requiring written complaints about bills due to waiver and estoppel theories. The court disagreed, stating that waiver was not raised in the lower court and therefore could not be used on appeal. S. J's reference to estoppel was also deemed insufficient as it lacked legal authority and adequate explanation, leading to waiver of that issue as well.

Regarding S. J's claim of usury, the court found no error in the trial court's summary judgment against S. J. S. J contended that American charged an interest rate exceeding 10% per annum, citing the operating agreement that specified a 12% interest rate or the maximum allowed by law. However, the court noted that in 1980, the maximum interest permissible was 10%, but the agreement allowed for a rate of 12% or lower, creating a distinction from precedent cases like Reagan and Hockley County Seed, which involved fixed rates or single debts. The court concluded that the unique structure of the operating agreement, which contemplated multiple debts and permitted variable interest rates, did not support S. J's usury claim.

Adopting S. J's proposition conflicts with the rulings in Reagan and Hockley County, which establish that usury is assessed based on the interest rate applicable at the time a debt is created. Since the debts in American's case arose after the execution of the operating agreement, the interest rate in effect when those debts were created applies. Under Texas law, specifically referencing TEX. REV. CIV. STAT. ANN. 5069-1.04(b)(1), the maximum interest rate of 18% exceeded the 12% charged by American, indicating no usury occurred. Additionally, American’s practice of compounding the 12% interest monthly was permissible as both parties agreed to this method, supported by the precedent set in Texon Energy Corp. v. Dow Chemical Co., which upheld similar contractual provisions.

Regarding the interlocutory summary judgment awarding American $34,241.31, S. J contends that the trial court erred due to American's failure to attach necessary documents to the affidavit of its president, Carroll Beaman. These documents, which included excerpts from Richard Stowers' deposition, were essential for substantiating the uncontested charges. Rule 166a(f) of the Texas Rules of Civil Procedure mandates that all references in an affidavit must be accompanied by sworn copies, and failure to do so constitutes a critical defect. This omission prevents the court from verifying Beaman's conclusions regarding the charges, and such a defect can be raised on appeal, regardless of whether it was initially flagged in the trial court. The absence of the deposition excerpts rendered the summary judgment improperly supported.

The appellate record does not show that the deposition was filed, nor does it specify where the disputed charges are located within the deposition. As a result, American failed to comply with Rule 166a(f) by not attaching verified deposition excerpts to its affidavit, making the affidavit fatally defective. Consequently, the testimony regarding the amounts allegedly owed by S.J. does not legally establish American's entitlement to $32,241.31.

Regarding the fraud claim, S.J. argued that American charged for expenses on non-operating wells from 1990 to 1998, but the trial court directed a verdict against S.J. S.J. contended this was erroneous due to existing evidence of disputed elements; however, as S.J. did not pay the allegedly false bills, it could not demonstrate damage, an essential element of fraud. Additionally, since S.J. did not act upon the misrepresentations, it could not claim reliance on them, supporting the court's decision.

On claims of intentional misconduct and gross negligence, the trial court also directed a verdict in favor of American. S.J. alleged that American failed to shut-in non-operating wells and improperly charged expenses, but the court found no evidence of gross negligence or damages from the alleged misconduct. S.J. failed to challenge each ground for the verdict effectively and did not provide evidence of personal damages suffered due to American's actions, only referencing broader investor losses. Therefore, S.J. did not meet the burden of proof required to overturn the directed verdict.

The court upheld the principle established in Hunt v. Bass, which states that a party lacks standing to seek redress for injuries sustained by another. As a result, the trial court's decision to direct a verdict in favor of American regarding claims of intentional misconduct and gross negligence was affirmed. 

Regarding the jury's response to question two, which pertained to the operating agreement's provision on interest, the court found no error. The provision required non-operators to pay bills within 15 days, and if unpaid, the balance would incur interest at 12% per annum or the maximum allowed by usury laws. The jury correctly interpreted this as permitting monthly compounding of interest, consistent with Texon Energy Corp. v. Dow Chemical Co.

On the topic of attorney's fees, the court determined that such fees could not be awarded to American unless it successfully proved its claim against S. J. for the unpaid debt of $32,241.32. Given the court's conclusion that the trial court erred in granting summary judgment favoring American on this debt claim, the award for attorney's fees was also reversed. 

Additionally, the court clarified that the interpretation of an unambiguous contract is a legal question for the court, not the jury. The specific provision at issue was deemed clear and should not have been submitted to the jury for interpretation. The judgment awarding American the debt amount and related interest was reversed.