The sellers of a gas gathering company in far West Texas are suing midstream energy company Energy Transfer for breach of contract and are claiming that the contract entitles them to a payout of more than $100 million. But lawyers for Energy Transfer claim they were duped into the agreement and that it should be thrown out.
The litigation began in April 2022 when Energy Transfer, represented by Lynn Pinker Hurst & Schwegmann, filed a lawsuit against Culberson Midstream Equity and Moontower Resources Gathering alleging a breach of their 2018 contract. They said Culberson and Moontower failed to deliver committed gas and even accused them of transferring committed gas to a competitor. Discovery revealed correspondence from investors that lawyers argue shows an intent to fraudulently induce Energy Transfer into the contract.
Culberson and Moontower, represented by Reese Marketos, filed a counterclaim, also alleging breach of contract. According to an option agreement between the parties, Energy Transfer was obligated to purchase Culberson for more than $93 million by May 24, 2022. Culberson and Moontower are seeking about $103 million in damages and prejudgment interest.
Dallas County district Judge Bridgett Whitmore recently took the rare step of realigning the parties, making Energy Transfer the defendants, at the request of Culberson and Moontower.
Whitmore ruled this week on five motions for summary judgment from the two sides following a Sept. 20 hearing. Whitmore found Energy Transfer breached the option agreement but Culberson and Moontower can’t collect just yet — Whitmore also ruled Energy Transfer gets to argue its fraud claim. She declined to rule on whether Culberson breached the contract.
Joel Reese, who represents Culberson and Moontower, said the summary judgment rulings are a victory for his client, entitling it to more than $103 million in damages. He told The Lawbook that, if granted permission from the court, he intends to appeal Judge Whitmore’s ruling allowing Energy Transfer’s “frivolous” fraud claim to proceed.
“And, if trial becomes necessary, we look forward to trial of whatever is left, if anything, of Energy Transfer’s claim,” he said.
Mike Lynn, who represents Energy Transfer, declined to comment.
Before the deal was signed in October 2018, oil and gas producers flocked to Culberson County with high hopes the unproven land would be the next emerging area for gas production, Reese wrote in court documents for Culberson and Moontower.
Culberson was a new operation hoping for success gathering gas like others had on nearby land. With money from investor Oaktree Capital Management, Charger Shale Oil Company, now known as Moontower Resources, bought leases and drilled, Reese said. Culberson won the deal to gather and process the gas.
Both Energy Transfer and Culberson/Moontower knew during negotiations that drilling on the land was risky, and they created an option agreement to account for the risk, Culberson and Moontower told the court in their petition. The option agreement allowed Culberson to sell to Energy Transfer at a cost below the market price if the land didn’t produce gas, according to the counterclaim.
Culberson and Moontower argue Energy Transfer knew all along that recent drilling on the land had been unsuccessful. Before the agreements were signed, Culberson gave Energy Transfer a geology report that showed Charger drilled six bad wells by April 2018. Tiny fractures had been discovered in the rocks and Energy Transfer’s own drilling expert advised against the deal until Charger successfully completed a well, according to a deposition Reese pointed to during the Sept. 20 hearing in Whitmore’s court.
Energy Transfer didn’t heed the warning, Reese said. The gathering agreement and option agreement were signed in October 2018.
Lynn, representing Energy Transfer, argued the sellers never intended to hold up their end of the bargain because they didn’t have the funding. During the Sept. 20 hearing, Lynn pointed to an Oct. 8, 2018, memo obtained during the course of the lawsuit that shows investor Oaktree placed a moratorium on drilling in the spring of 2018 until the issues with the acreage dedicated to Culberson Midstream were resolved.
“They shut down a whole program and they want a $93 million check. They should not be able to get that,” Lynn told the judge last week.
Lynn drew a comparison to the sale of a home.
“If it’s the living room and the bathroom that have the termites, but somebody says the house is great and you don’t tell them that the living room and the bathroom have termites — that’s fraud,” Lynn said.
Lynn also pointed to an email between investors that he said lays out intent to defraud. In an email about another issue having to do with natural gas liquids, a partner with Tailwater Capital stated:
“Here is my thought. Culberson Midstream will cover the excess cost per gallon of [natural gas liquids] flowed. However, since we don’t want to have to create a document that is disclosable to ETP, then I suggest the following.
- Legal contract directly between Producers Midstream (“PMLP”) and Charger
- Instead of between Culberson Midstream and Charger so it’s not disclosable.”
“These are people who are incredibly, cold-bloodedly calculated, and they basically were going to try to hide this information through a contractual device,” Lynn said.
But Culberson and Moontower accuse Energy Transfer of manufacturing a fraud claim. In the hearing last week, Reese called Lynn’s narrative incorrect and characterized the argument that Energy Transfer was left in the dark as “nonsense.” Reese said Culberson and Moontower spent millions of dollars before and after the deal was reached trying to gather oil from the land. The lawyer pointed to another section in the same memo that shows Oaktree replaced the Charger management team in the summer of 2018 and that the new leaders were drawing up a “go-forward drilling plan.”
“The concept of these guys doing fraud is crazy,” Reese said.
Reese said Energy Transfer is trying to get off the hook for $93 million. In March, 2022, the sellers alerted Energy Transfer to the upcoming $93 million sale, Reese said. Energy Transfer responded with claims it did not receive committed gas but didn’t identify from which wells, Reese said. In April, Energy Transfer terminated the option agreement and filed the lawsuit.
“Because Energy Transfer’s wager has turned out to be a bad bet due to a lack of oil and gas, Energy Transfer has searched for ways to avoid its obligations to purchase Culberson,” Reese wrote in his counterclaim.