A Houston appeals court has affirmed the dismissal of a $460 million lawsuit against Five Point Energy by Patterson Midstream Services, one of its portfolio members.
The lawsuit claimed that Houston-based Five Point’s management and several of its investment funds had usurped corporate opportunities that should have gone to Patterson Midstream and its owner, Marty Patterson.
In a 27-page opinion, the First Court of Appeals last week affirmed a trial court decision dismissing the lawsuit brought by plaintiff Marty Patterson and his company, Patterson Midstream Services.
The appeals court’s ruling appears to be a straightforward affirmation of a relatively simple contract dispute. But in addition to a nine-figure sigh of relief for Five Point, the ruling also provides clear guidance for similarly situated corporate entities that find themselves in disputes with their LLC partners, Five point’s lawyers said.
“It has some very concise summaries of a lot of important points of law,” Five Point attorney Kenneth Held, a partner in Skadden Arps Slate Meagher & Flom’s Houston office, said of the opinion. “I think it crystallizes a lot of precedent in one opinion in the context of fact patterns that many commercial parties find themselves in. The opinion is really a roadmap of how to analyze disputes under LLC operating agreements.”
Patterson’s lawyers did not immediately respond to requests for comment.
Founded in 2012, Five Point Energy focuses on building businesses within the midstream and energy infrastructure sectors. Five Point’s investments include San Mateo Midstream I and San Mateo Midstream II (both joint ventures between Five Point and Matador Resources), Twin Eagle Resource Management, WaterBridge Resources , EVX Midstream I and EVX Midstream II.
In 2013, Five Point and Patterson formed a new portfolio, Redwood Midstream Partners. Under their operating agreement, Five Point owned 75%, while Patterson owned 25%. The parties governed their agreement under Delaware law.
Patterson sued the defendants in 2019 on claims that he was entitled to his 25% distribution on $460 million worth of investments that he said he had identified for Redwood. He brought claims of breach of contract and violation of the covenant for good faith and fair dealing under Delaware law and additional claims under Texas law.
But Five Point argued that an amended agreement signed by the parties in 2014 allowed Five Point to make investments — even those identified by Patterson — without offering Redwood the right to participate.
Five Point filed a Rule 91a motion to dismiss, which Harris County District Judge Michael Gomez granted last year. Rule 91a is still a fairly new defense tool in state courts, and because attorneys’ fees are also at stake, defendants can be hesitant to utilize this legal move — particularly because trial courts often prefer for parties to conduct discovery before making any dismissal decisions, Held said.
But during an August 2019 hearing, Houston Skadden partner Noelle Reed argued on behalf of Five Point that there was a “fundamental mismatch” between the agreement established and what Patterson claimed, which meant the plaintiffs had no standing to bring their claims.
“The agreement that their claim is based upon is an operating agreement,” she said at the hearing. “It’s not a brokerage agreement. It’s not a commission agreement.”
Judge Gomez sided with Reed and awarded Five Point $50,000 in attorneys’ fees.
On appeal, Patterson argued that Judge Gomez erroneously dismissed the case because the contract is ambiguous. He also argued that the trial court should have found that Five Point committed fraud, breach of contract, unjust enrichment, quantum meruit and conversion because Five Point duped Patterson into signing the amended agreement by misrepresenting beforehand that all investments sourced by Patterson would be placed with Redwood, the entity Patterson had an interest in.
The First Court rejected that argument.
“Patterson is attempting to use the implied duty of good faith and fair dealing to create a fiduciary duty for Five Point not to usurp Redwood’s investment opportunities,” the opinion, written by Chief Justice Sherry Radack says. “However, section 4.1.2 of the amended operating agreement explicitly provides that the contract ‘does not create or impose any fiduciary duties on any member, manager or officer. …’ Because Patterson’s claim of reliance on representations to the contrary are directly contradicted by the express, unambiguous provisions of the amended operating agreement, Patterson cannot show, as a matter of law, that its reliance on such representations was justified.”
Held said the appellate ruling is important because it demonstrates that “the courts are willing to interpret contractual language when plain on its face and provide clarity to the parties that the deal negotiated will be the deal enforced” before it allows the parties “to be mired in discovery.”
Other Houston-based Skadden lawyers representing Five Point include counsel Wallis Hampton and associates Amelia Friedman and Christian Adriatico.
Patterson’s lawyers are Ken Wynne, Scott Burdine and David Wynne of Burdine Wynne in Houston.