Paint Rock Operating, LLC v. Chisholm Exploration, Inc., and Chisholm Production, Inc.

Citation: Not availableDocket: 11-09-00353-CV

Court: Court of Appeals of Texas; April 14, 2011; Texas; State Appellate Court

Original Court Document: View Document

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An accounting dispute arose in the case of Paint Rock Operating, LLC v. Chisholm Exploration, Inc. and Chisholm Production, Inc., heard in the Eleventh Court of Appeals. Paint Rock sought to recover costs incurred while operating four leases, after transferring operations from Chisholm in December 2005. The trial court awarded Paint Rock $3,927.40 but denied most of its claims, leading Paint Rock to appeal for a larger recovery and attorney’s fees.

The background involves a Joint Operating Agreement (JOA) executed in 1998 for the Texaco Fee Lease, while the other leases lacked a JOA. Paint Rock sent Joint Interest Billings (JIBs) for expenses incurred, but Chisholm only partially paid these, marking up the bills to indicate disputed charges. 

On appeal, Paint Rock raised four issues: challenges to specific findings of fact, denial of its quantum meruit claim, and rejection of its attorney's fees. The court reviewed the trial findings for legal and factual sufficiency, focusing on whether Paint Rock breached the JOA by late billing. The trial court concluded that Paint Rock did breach the JOA, as it failed to bill Chisholm timely for the relevant months, despite Paint Rock's argument that Chisholm had not alleged a breach in its pleadings. The JOA required operators to bill non-operators by the month's end for the previous month's expenses, which Paint Rock failed to comply with.

Darryl Buckingham, owner of Paint Rock, acknowledged his obligation under the Joint Operating Agreement (JOA) to submit monthly bills by the end of the succeeding month, with the December 2005 bill due by January 31, 2006. Buckingham admitted that twelve of the fourteen bills sent to Chisholm were late; specifically, the December 2005 Joint Invoice Bill (JIB) was received by Chisholm in June 2006, and the January through May JIBs were received in July 2006. Although Chisholm did not formally plead breach of contract, the issue was effectively tried, as evidenced by Buckingham's cross-examination and the testimony regarding the receipt dates of the JIBs. The court determined that the issue was tried by consent due to the absence of objections to the evidence presented.

In addressing Paint Rock's contention regarding written exceptions to the JIBs, the JOA stipulates that non-operators must provide written exceptions to disputed charges within 24 months. Chisholm’s president, Charles Schroeder, noted several charges he contested, including increased overhead and costs associated with a production supervisor, marking these objections directly on the JIBs. However, he did not submit a formal written explanation for his disputes, believing his objections were evident. The operational overhead charged by Chisholm was $400 per month per well, which Paint Rock later adjusted, leading to a refusal from Chisholm to pay the increased rate. The trial court found that Chisholm properly excepted to the JIBs, reinforcing the conclusion that Paint Rock breached the JOA.

Paint Rock performed several repairs without submitting an Authority for Expenditure (AFE) as required by the Joint Operating Agreement (JOA) for costs exceeding $10,000. Buckingham acknowledged that no AFE was provided despite charges exceeding this threshold. Chisholm objected to these charges, but the JOA does not specify what constitutes a sufficient written exception. Buckingham believed an explanation for objections was needed, whereas Schroeder contended that the objections were evident. The trial court upheld Chisholm’s exceptions to the Joint Interest Billings (JIBs), concluding that Paint Rock was aware of the disputed charges. 

Paint Rock also contested the trial court's refusal to award the full amount of its JIBs, claiming that it had increased overhead and hired a production supervisor without submitting an AFE. The JOA allows for annual adjustments based on average earnings in the sector, but Buckingham miscalculated the overhead rate based on incorrect assumptions. The court found that Paint Rock violated the JOA by proceeding with repairs over the $10,000 limit without an AFE, and concluded that Chisholm was not obligated to pay for charges deemed unnecessary. 

Additionally, Paint Rock argued that the trial court erred in denying its quantum meruit claim, but the court found no error in denying recovery for disputed charges on the Texaco Fee Lease, which extended to other leases as well. 

Finally, Paint Rock challenged the trial court's denial of attorney's fees, highlighting that Chisholm objected due to insufficient disclosure of the amount and calculation method for these fees. The trial court's findings supported Chisholm’s objection, affirming that Paint Rock did not adequately respond to discovery requests regarding attorney’s fees.

Paint Rock contends it was not obligated to disclose information regarding its claim for attorney’s fees, arguing that under Tex. R. Civ. P. 194.2(d), only economic damages require disclosure and attorney’s fees do not qualify as such. However, this argument is unnecessary to address since Chisholm acknowledges that an award of attorney's fees in cases of breach of contract or quantum meruit is discretionary. The trial court denied Paint Rock's recovery for most of the unpaid items claimed and found that Paint Rock breached the Joint Operating Agreement (JOA) by failing to timely submit Joint Interest Billings (JIBs). Consequently, the trial court did not abuse its discretion in denying attorney's fees. Issues Three and Four are rejected, and the trial court's judgment is affirmed. The panel included Chief Justice Wright, Justice McCall, and Justice Strange. The JOA referenced is an A.A.P.L. Form 610-1982 Agreement, which stipulates conditions for project expenditures and emergency actions by the Operator. The court clarifies that its ruling does not establish that merely marking out charges on a JIB satisfies compliance with COPAS Article I.4, as it only reviews the sufficiency of evidence for the trial court's findings.