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CAUSE NO. 2016-45652
PEREGRINE OIL & GAS LP
IN THE DISTRICT COURT OF
Plaintiff,
HARRIS COUNTY, TEXAS
HRB OIL & GAS, LTD. and
VHPM, LLC 190TH JUDICIAL DISTRICT
Defendants.
DEFENDANTS’ RESPONSE TO PLAINTIFF’S TRADITIONAL MOTION FOR
SUMMARY JUDGMENT AND MOTION FOR PARTIAL SUMMARY JUDGMENT
Defendants HRB Oil & Gas, Ltd. and VHPM, LLC (“Defendants”) file this Response to
Plaintiff’s Traditional Motion for Summary Judgment in support thereof and respectfully state as
follows:
PROCEDURAL BACKGROUND AND FACTS
Although the facts relevant to this Response to Plaintiff’s Traditional Motion for
Summary Judgment (this “Motion”) have been set forth in Defendant’s previous Motion for
Partial Summary Judgment and Amended Motion for Partial Summary Judgment (together the
HRB Motion”), a brief summary of the most relevant facts and procedural history is helpful to
place this Motion in the appropriate context:
Defendant HRB Oil & Gas, Ltd. (“HRB”) and Plaintiff Peregrine Oil & Gas, LP
(“Peregrine”) are parties to (i) a Participation Agreement (the “Participation
Agreement”), which also contains an Operating Agreement (the “Operating
Agreement”) including various accounting procedures, under which certain
Defendant VHPM, LLC (“VHPM”) is the General Partner of HRB. VHPM is not a party to any of the agreements
related to this lawsuit.
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parties agreed to participate in the drilling of a well (the “Test Well”) on a Texas
offshore oil and gas lease covering Block A-155, Galveston Area, South Addition
(the “Subject Lease”) and (ii) an Assignment of Record Title Interest in the
Subject Lease (the “Assignment” and together with the Participation Agreement
and Operating Agreement the “Agreements”).
2. On December 15, 2015, Peregrine notified HRB that, according to Peregrine’s
calculations and retroactive adjustments, (i) “Payout” under the Participation
Agreement had occurred, almost two and a half years earlier, on June 1, 2013, and
(ii) HRB had been overpaid revenues in the amount of $210,883.31.
3. On July 8, 2016, as a result of HRB’s refusal to pay the amounts Peregrine claims
are due, Peregrine filed its Original Petition alleging two causes of action: (1)
breach of contract and (2) money had and received.
4. In its response to HRB’s First Set of Interrogatories, Peregrine confirmed that its
breach of contract claim is based upon an alleged breach of (i) Paragraph 4 of the
Participation Agreement and (ii) the terms of the Assignment. However, neither
Paragraph 4 of the Participation Agreement, nor the terms of the Assignment,
include any promise or undertaking of HRB to refund to Peregrine any alleged
overpayments.
5. On September 20, 2016, after several discovery-related motions, HRB filed a
Motion for Partial Summary Judgment showing that Peregrine’s breach of
contract claims failed as a matter of law and requesting that the Court apply the
The Agreements have been attached to several prior petitions and motions in this proceeding. Therefore, said
documents have not been included as exhibits in this Motion.
See Page 2, paragraph 1 of the Payout Notification attached to HRB’s Motion as Exhibit “C”.
See Peregrine’s Responses to HRB’s Interrogatories Nos. 1 & 2 attached to HRB’s Motion as Exhibit “D”.
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two (2) year statute of limitations applicable to equitable claims, such as money
had and received, to the claims and damages asserted by Peregrine.
6. Due to the obvious lack of any language in either Paragraph 4 of the Participation
Agreement or the terms of the Assignment which would impose an obligation on
HRB to refund allegedly overpaid revenues, on November 8, 2016, Peregrine
amended its Original Petition and began claiming that HRB had breached
provisions of the Operating Agreement instead.
7. On November 17, 2016, Peregrine filed its Plaintiff’s Traditional Motion for
Summary Judgment (the “Peregrine Motion”) alleging that it had established its
breach of contract claims as a matter of law and requesting that the Court grant
summary judgment in favor of Peregrine.
8. HRB now responds to Peregrine’s Motion in advance of the Summary Judgment
Hearing scheduled to take place on January 6, 2017.
INTRODUCTION
There are essentially just two issues to be decided by the Court with respect to
Peregrine’s Motion. First, the Court must decide whether or not HRB actually breached the
contract. The HRB Motion asserts that, as a matter of law, Peregrine cannot maintain a cause of
action for breach of contract, while Peregrine’s Motion alleges that, as a matter of law, it has
established its claim for breach of contract. Thus, the primary issue to be decided by the Court is
whether or not Peregrine can, as a matter of law, sustain a cause of action for breach of contract.
Second, in the unlikely event that the Court finds that HRB did have a contractual
obligation to refund alleged overpayments of revenues, the Court must then decide whether
Peregrine’s calculation of payout was made in accordance with the terms of the Agreements.
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HRB disputes Peregrine’s calculation of the alleged overpayments because Peregrine’s
calculation of payout included gas transportation revenues owed to HRB under a completely
separate and distinct Production Handling Agreement. Because these revenues were paid to
HRB under a completely separate agreement, they should not have been credited as production
revenues from the Test Well which was the subject of the Participation Agreement. Because
such revenues are not production from the Test Well or the Subject Lease, they should not have
been used to calculate payout of the Test Well drilled on the Subject Lease.
If the Court holds that no contractual obligation to refund alleged overpayments exists,
then:
1. Peregrine’s Motion must be denied because the only ground for recovery set forth in
Peregrine’s Motion is breach of contract.
2. The two (2) year statute of limitations applicable to equitable actions will apply to
Peregrine’s remaining money had and received claim and any damages alleged by
Peregrine which occurred prior to July 8, 2014 will be time-barred.
ARGUMENT
Peregrine’s Motion severely confuses the issues before the Court with its emphasis on
before payout (“BPO”) and after payout (“APO”) interests, joint interest billings (“JIB’s”),
authority for expenditures (“AFE”) and the like. Boiled down to its simplest terms, Peregrine
alleges that it mistakenly overpaid HRB $210,883.31 in production revenues from an offshore oil
and gas lease because of an accounting mistake. Thus, assuming arguendo, that Peregrine’s
calculations of payout are correct and Peregrine did, in fact, overpay revenues to HRB, the
question before the Court is whether or not HRB’s failure to refund the amounts allegedly
overpaid is a breach of contract or an equitable claim for money had and received.
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I. Peregrine’s breach of contract claims fail as a matter of law because there are no
provisions in any of the Agreements which impose an obligation on the part of HRB
to refund allegedly overpaid revenues.
Under Texas law, a party does not breach a contract until it fails or refuses to do
something it has, either expressly or impliedly, promised to do. Therefore, in order to determine
whether or not Peregrine can sustain a cause of action for breach of contract, the Court must
decide whether any of the provisions of the Participation Agreement, Operating Agreement, or
Assignment amount to a promise by HRB sufficient to impose a contractual obligation upon
HRB to refund overpaid revenues. If there are no contractual provisions obligating HRB to
refund overpaid revenues, Peregrine cannot sustain a cause of action for breach of contract
against HRB, and its claims sound in equity.
A non-operator’s obligation to refund overpaid production revenues has been directly
addressed by at least one Texas court in a case with nearly indistinguishable facts from those in
this proceeding. Mobil Producing was previously analyzed in both of the HRB Motions and
will not be fully re-visited here. For purposes of this Motion, it suffices to note that the court in
Mobil Producing confirmed that where the contract contains no obligation on a party to suspend
(refuse to accept) overpayments, a party has not breached the contract by its failure to refund
said overpayments.
None of the Agreements contain any provisions which can realistically be interpreted as
an obligation to suspend or refund allegedly overpaid revenues. In Plaintiff’s Original Petition
and its response to HRB’s First Set of Interrogatories, Peregrine confirmed that its breach of
B & W Supply, Inc. v. Beckman, 305 S.W.3d 10, 16 (Tex. App.-Houston [1st Dist.] 2009) citing Mays v. Pierce,
203 S.W.3d 564, 575 (Tex. App.-Houston [14th Dist.] 2006, pet. denied); Examination Management Services, Inc.
v. Kersh Risk Management, Inc., 367 S.W.3d 835 (Tex. App.-Dallas 2012) citing Case Corp. v. Hi–Class Bus. Sys.
of Am., Inc., 184 S.W.3d 760, 769–70 (Tex. App.-Dallas 2005, pet. denied).
Mobil Producing Texas & New Mexico, Inc. v. Cantor, 93 S.W.3d 916 (Tex. App.—Corpus Christi 2003, no pet.)
Id. at 922 (Concurring Opinion by Justice Dorsey).
See Plaintiff’s Original Petition, Paragraph 14.
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contract claim was based upon an alleged breach of (i) Paragraph 4 of the Participation
Agreement and (ii) the terms of the Assignment. Unfortunately for Peregrine, an examination
of these two (2) Agreements reveals no promise or contractual undertaking to refund allegedly
overpaid revenues.
The Participation Agreement obligated HRB to pay its share of the costs of drilling a well
and constructing a platform,10 while the Assignment states only that Peregrine has the right to
receive an assignment of its APO interests following Payout.11 Neither of these Agreements
contain any provision even referencing overpaid revenues. Thus, according to Mobil Producing,
HRB cannot be in breach of either of these Agreements.
Rather than attempting to distinguish this case from Mobil Producing, Peregrine has
simply changed its argument and become more creative12 in its interpretation of certain
provisions of the Operating Agreement. Because no affirmative obligation to refund allegedly
overpaid revenues can be found in any of the Agreements, Peregrine has been forced to attempt
to imply such a contractual obligation.
A. The Operating Agreement does not contain any provisions, either express or
implied, which require HRB to refund allegedly overpaid revenues.
As noted above, Peregrine originally claimed that HRB breached Paragraph 4 of the
Participation Agreement and certain language in the Assignment by refusing to refund the
allegedly overpaid revenues. However, instead of sticking to their original claims of breach,
Peregrine’s Motion has left those out altogether and now attempts to use Articles 8 and 22,
combined with the accounting procedures of Exhibit “C” to the Operating Agreement to imply
See Peregrine’s Responses to HRB’s Interrogatories Nos. 1 & 2 attached to HRB’s Motion as Exhibit “D”.
10
Participation Agreement, Section 3, attached to HRB’s Motion as Exhibit “A”.
11
Page 2, third paragraph of the Assignment, attached to HRB’s Motion as Exhibit “B”.
12
In fact, Peregrine has gotten so creative that they are unable to cite a single authority in any context, let alone
related to overpaid oil and gas revenues, which supports their position.
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an obligation imposed upon HRB.13 Unfortunately for Peregrine, its latest attempts to create an
implied obligation are equally unpersuasive.
Peregrine’s attempts to conjure up an obligation to refund alleged overpayments are
entirely dependent on the meaning of one word: “charges”. Reduced to its essence, Peregrine’s
argument is that HRB had an obligation to pay whatever “charges” Peregrine labeled as such in a
JIB. The question for this Court is whether or not allegedly overpaid revenues are “charges due
under the [Operating] Agreement.” If they are not, Peregrine has no case.
Peregrine claims that HRB’s failure to refund allegedly overpaid revenues is a breach of
Article 8.7.14 Article 8 of the Operating Agreement governs expenditures in general and Article
8.7 is a subset of Article 8 which provides in relevant part:
8.7 Unpaid Charges and Default. If a Party fails to pay the charges due
under this Agreement…if a Party does not pay, when due, its share of the charges
under this Agreement…the Party shall be in default…If a Party believes that
Operator’s charges, or a portion thereof, are incorrect, that Party shall
nevertheless pay the charges claimed by Operator and may notify Operator that
the charges are in dispute…
Additionally, Article 8.1 is an important provision in understanding the overall context of
Article 8, and provides as follows:
8.1 Basis of Charge to the Parties. Subject to the other provisions of this
Agreement, Operator shall pay all costs incurred under this Agreement, and each
Party shall reimburse Operator in proportion to its Participating Interest. All
charges, credits and accounting for expenditures shall be made and done
pursuant to Exhibit “C”. [the Accounting Procedure] [emphasis added].15
Article 8.1 clearly establishes (i) that the “expenditures” governed by Article 8 are those
costs incurred by the Operator under the Operating Agreement, and (ii) that the costs and
expenditures incurred by the Operator under the Operating Agreement are subject to the
13
See Peregrine’s Motion at Paragraph 15.
14
See Peregrine’s Motion at Paragraph’s 26-27.
15
See Article 8.1of Operating Agreement (Exhibit “C”) to Participation Agreement, attached to HRB’s Motion as
Exhibit “A”.
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accounting provisions of Exhibit “C” (the Accounting Procedure) attached to the Operating
Agreement.
The Operating Agreement is perfectly clear about what “charges” the Operator is allowed
to bill to the non-operators and for which the non-operators are contractually obligated to pay:
costs and expenditures. Likewise, it is the “charges” for costs and expenditures under the
Operating Agreement that are governed by the Accounting Procedures in Exhibit “C” to the
Operating Agreement. It cannot be reasonably argued that production revenues paid to non-
operators are part of the costs or expenditures incurred under the Operating Agreement.
Articles 22.3 and 22.5 are no help to Peregrine either. Article 22.3 does not establish any
obligation on the part of HRB to refund overpayments. It states only that if HRB does not take
their share of production in-kind, Peregrine has the right to take and market the production on
HRB’s behalf. It also provides that Peregrine, as Operator, must pay the non-operators who did
not take their gas in-kind for their share of revenues. An obligation on the part of the Operator to
pay a party for its share of revenues does not impose a reciprocal obligation on the non-operator
to either suspend or refund any overpayments mistakenly made by the Operator. Thus, Article
22.3 does not, in any way, impose an obligation on non-operators to refund overpaid revenues.
Article 22.5 provides as follows:
22.5 Expenses of Delivery in Kind. A cost that is incurred by Operator in
making delivery of a Party’s share of oil, gas, or condensate or disposing of same
shall be paid by the Party.
Like Article 8, Article 22.5 obligates HRB to pay for its share of the cost incurred by
Peregrine in connection with marketing HRB’s share of gas production. It does not in any way
obligate HRB to refund allegedly overpaid revenues generated from the sale of the gas.
Each of the provisions relied upon by Peregrine in itsattempt to establish a promise or
obligation on the part of HRB are inapplicable and misplaced. The provisions cited by Peregrine
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obligate HRB to pay for its share of costs and expenses of either producing or marketing the oil
and gas from the Subject Lease and nothing more. No provision of any of the Agreements,
including those referenced by Peregrine, suggests that overpaid revenues are a cost or expense
associated with the marketing or production of oil and gas. Therefore, none of the provisions in
any of the Agreements amounts to a promise or obligation to suspend or refund allegedly
overpaid revenues and HRB cannot be found to have breached the contract.
Further, the “adjustments” that Peregrine has attempted to effectuate in its JIB’s do not
seek to account for overpaid or underpaid costs or expenses of any kind. In fact, Peregrine
admits that HRB actually paid MORE than its share of the costs and expenses of drilling,
production and marketing. Peregrine’s adjustments are nothing more than an attempt to collect
revenues that it claims were mistakenly overpaid to HRB by labeling them as “charges” in a JIB.
II. Peregrine’s calculation of payout and the amount of damages are incorrect,
unreliable and fundamentally flawed and must not be awarded in a Summary
Judgment.
In the event that this Court does find that HRB had a contractual obligation to refund the
allegedly overpaid production revenues, the next questions for the Court are (i) whether
Peregrine’s payout calculations were performed in accordance with the terms of the Participation
Agreement and the Assignment, and (ii) whether Peregrine’s calculations accurately establish the
amount of Peregrine’s damages. The answer to both of these questions is clearly “no”.
A. Peregrine’s calculation of payout of the Subject Lease is incorrect because it
included revenues paid to HRB from sources other than the Subject Lease.
Although the term “payout” is not actually defined in any of the Agreements, the various
provisions of the Agreements referring to payout still provide guidance. The Operating
Agreement does not address payout at all but certain provisions in both the Participation
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Agreement and the Assignment help to establish how the calculation of payout was
contemplated. The Participation Agreement provides as follows:
The Assignment will include a reservation by Peregrine of a 25% of 6/6ths
working interest after payout the costs associated with drilling and completing the
of the Initial Test Well, platform and facilities …[and] other costs associated with
producing the Test Well. [emphasis added]16
Pursuant to the provision of the Participation Agreement referenced above, the
Assignment contains the following reservation to Peregrine:
…the right of Peregrine to receive after Payout an assignment from HRB of an
undivided 25% working interest in the Subject Lease. [emphasis added] 17
“Subject Lease” is a defined term in the Assignment. It is specifically defined as the federal oil
and gas lease covering Block A-155 Galveston Area, South Addition.
The above provisions clearly establish that the calculation of payout was intended to be
based upon HRB’s receipt of revenues from the Test Well in an amount sufficient for HRB to
recover its costs of participating in the drilling of the Test Well and the installation of the
associated platform and facilities on the Subject Lease.
However, Peregrine’s calculation of payout included not only revenues from the sale of
production from the Test Well, but also improperly included substantial pipeline transportation
revenues received by HRB under a separate Production Handling Agreement.18 The Production
Handling Agreement was entered into by and between HRB, Peregrine and the other working
interest owners in Block A-155 with the oil and gas producers in an adjacent offshore block
(Block A-133). The Production Handling Agreement provides for the processing of oil and gas
produced from Block A-133 on the Block A-155 Platform and the transportation of such third
16
Participation Agreement § 4(a).
17
Page 2, third paragraph of the Assignment.
18
See Deposition of Danny Crawford, Pages 21-25 attached hereto as Exhibit A, and incorporated herein by
reference.
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party oil and gas through a pipeline operated by Peregrine that extends several miles from the
Subject Lease to an interconnecting pipeline.19 Under the Production Handling Agreement, the
producers in Block A-133 pay processing and transportation fees to HRB, Peregrine and the
other working interest owners in Block A-155.
The Production and Handling Agreement HRB entered into with the owners of the
adjacent block was a totally separate agreement from the Participation Agreement and the
Operating Agreement covering the Subject Lease. Therefore, the inclusion by Peregrine of the
substantial revenues received by HRB under this separate contract in calculating payout was not
proper under the Participation Agreement, and Peregrine’s calculation of payout is clearly
incorrect.
B. Peregrine’s calculation of damages are incorrect and fundamentally flawed
because Peregrine credited itself with an APO interest in the transportation
revenues as well as the Subject Lease.
As noted above, under the terms of the Assignment, after payout, Peregrine reserved the
right to receive an assignment of an undivided 25% of a 6/6 working interest in and to the
Subject Lease 20 Additionally, the Participation Agreement ties each party’s interest to the
Subject lease through various definitions. “Participant’s Net Revenue Interest” is defined as “a
percentage of Participant’s Working Interest in the Lease” and “Lease” is defined as the lease
covering Block A-155 (Subject Lease).
Thus, according to both the Assignment and the Participation Agreement, Peregrine was
entitled to an increased “back-in” or APO working interest in the Subject Lease only and was not
entitled to an increased interest in the separate pipelines crossing numerous offshore lease
blocks. However, in Peregrine’s calculation of allegedly overpaid revenues and damages,
19
See Exhibit 3 to the Deposition of Danny Crawford, which depicts the locations of Block A-133, Block A-155 and
the pipeline that extends from Block A-155 to High Island area in Block A-536.
20
Page 2, third paragraph of the Assignment.
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Peregrine has credited itself with an increased interest in the pipeline transportation revenues as
well as the production from the Subject Lease. Because Peregrine’s “back-in” interest is clearly
limited to an increased working interest in the Subject Lease, its calculation of damages using an
increased interest in the revenues derived from the Production Handling Agreement are incorrect
and fundamentally flawed.
Both Peregrine’s payout calculations and, accordingly, its calculation of damages are
fundamentally flawed and Peregrine’s Motion should be denied not only because Peregrine has
failed to establish a cause of action for breach of contract (as opposed to a cause of action for
money had and received), but also because Peregrine’s calculations are not in accordance with
the terms of the contracts between the parties.
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PRAYER
HRB respectfully requests that the Court deny Peregrine’s Traditional Motion for
Summary Judgment and enter an order granting HRB’s Motion for Partial Summary Judgment
holding that (i) Peregrine’s First Cause of Action for breach of contract fails as matter of law and
(ii) any overpayments allegedly made by Peregrine to HRB prior to July 8, 2014 are barred by
the two year statute of limitations set out in Tex. Civ. Prac. & Rem. Code §16.003.
Respectfully submitted,
/s/ Barry F. Cannaday
Barry F. Cannaday
State Bar No. 03743500
barry.cannaday@dentons.com
DENTONS US LLP
2000 McKinney Ave., Suite 1900
Dallas, Texas 75201
(214) 259-0900 - telephone
(214) 259-0910 - facsimile
Laura Gibson
State Bar No. 07869350
laura.gibson@dentons.com
DENTONS US LLP
LyondellBassell Tower
1221 McKinney Street
Suite 1900
Houston, Texas 77010
(713) 658-4631 - telephone
(713) 739-0834 - facsimile
ATTORNEYS FOR HRB OIL & GAS, LTD and
VHPM, LLC
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CERTIFICATE OF SERVICE
I hereby certify that on December 28, 2016 a true and correct copy of the foregoing
document was served via the Court’s electronic filing system and/or email to all attorneys of
record as follows:
Michael D. Jones
Jones Gill LLP
6363 Woodway, Suite 1100
Houston, TX 77057
Email: mjones@jonesgill.com
Attorneys for Peregrine Oil & Gas Ltd
/s/ Barry F. Cannaday
Barry F. Cannaday
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Preview
CAUSE NO. 2016-45652 PEREGRINE OIL & GAS LP IN THE DISTRICT COURT OF Plaintiff, HARRIS COUNTY, TEXAS HRB OIL & GAS, LTD. and VHPM, LLC 190TH JUDICIAL DISTRICT Defendants. DEFENDANTS’ RESPONSE TO PLAINTIFF’S TRADITIONAL MOTION FOR SUMMARY JUDGMENT AND MOTION FOR PARTIAL SUMMARY JUDGMENT Defendants HRB Oil & Gas, Ltd. and VHPM, LLC (“Defendants”) file this Response to Plaintiff’s Traditional Motion for Summary Judgment in support thereof and respectfully state as follows: PROCEDURAL BACKGROUND AND FACTS Although the facts relevant to this Response to Plaintiff’s Traditional Motion for Summary Judgment (this “Motion”) have been set forth in Defendant’s previous Motion for Partial Summary Judgment and Amended Motion for Partial Summary Judgment (together the HRB Motion”), a brief summary of the most relevant facts and procedural history is helpful to place this Motion in the appropriate context: Defendant HRB Oil & Gas, Ltd. (“HRB”) and Plaintiff Peregrine Oil & Gas, LP (“Peregrine”) are parties to (i) a Participation Agreement (the “Participation Agreement”), which also contains an Operating Agreement (the “Operating Agreement”) including various accounting procedures, under which certain Defendant VHPM, LLC (“VHPM”) is the General Partner of HRB. VHPM is not a party to any of the agreements related to this lawsuit. 1|Page 102201969\V-2 parties agreed to participate in the drilling of a well (the “Test Well”) on a Texas offshore oil and gas lease covering Block A-155, Galveston Area, South Addition (the “Subject Lease”) and (ii) an Assignment of Record Title Interest in the Subject Lease (the “Assignment” and together with the Participation Agreement and Operating Agreement the “Agreements”). 2. On December 15, 2015, Peregrine notified HRB that, according to Peregrine’s calculations and retroactive adjustments, (i) “Payout” under the Participation Agreement had occurred, almost two and a half years earlier, on June 1, 2013, and (ii) HRB had been overpaid revenues in the amount of $210,883.31. 3. On July 8, 2016, as a result of HRB’s refusal to pay the amounts Peregrine claims are due, Peregrine filed its Original Petition alleging two causes of action: (1) breach of contract and (2) money had and received. 4. In its response to HRB’s First Set of Interrogatories, Peregrine confirmed that its breach of contract claim is based upon an alleged breach of (i) Paragraph 4 of the Participation Agreement and (ii) the terms of the Assignment. However, neither Paragraph 4 of the Participation Agreement, nor the terms of the Assignment, include any promise or undertaking of HRB to refund to Peregrine any alleged overpayments. 5. On September 20, 2016, after several discovery-related motions, HRB filed a Motion for Partial Summary Judgment showing that Peregrine’s breach of contract claims failed as a matter of law and requesting that the Court apply the The Agreements have been attached to several prior petitions and motions in this proceeding. Therefore, said documents have not been included as exhibits in this Motion. See Page 2, paragraph 1 of the Payout Notification attached to HRB’s Motion as Exhibit “C”. See Peregrine’s Responses to HRB’s Interrogatories Nos. 1 & 2 attached to HRB’s Motion as Exhibit “D”. 2|Page 102201969\V-2 two (2) year statute of limitations applicable to equitable claims, such as money had and received, to the claims and damages asserted by Peregrine. 6. Due to the obvious lack of any language in either Paragraph 4 of the Participation Agreement or the terms of the Assignment which would impose an obligation on HRB to refund allegedly overpaid revenues, on November 8, 2016, Peregrine amended its Original Petition and began claiming that HRB had breached provisions of the Operating Agreement instead. 7. On November 17, 2016, Peregrine filed its Plaintiff’s Traditional Motion for Summary Judgment (the “Peregrine Motion”) alleging that it had established its breach of contract claims as a matter of law and requesting that the Court grant summary judgment in favor of Peregrine. 8. HRB now responds to Peregrine’s Motion in advance of the Summary Judgment Hearing scheduled to take place on January 6, 2017. INTRODUCTION There are essentially just two issues to be decided by the Court with respect to Peregrine’s Motion. First, the Court must decide whether or not HRB actually breached the contract. The HRB Motion asserts that, as a matter of law, Peregrine cannot maintain a cause of action for breach of contract, while Peregrine’s Motion alleges that, as a matter of law, it has established its claim for breach of contract. Thus, the primary issue to be decided by the Court is whether or not Peregrine can, as a matter of law, sustain a cause of action for breach of contract. Second, in the unlikely event that the Court finds that HRB did have a contractual obligation to refund alleged overpayments of revenues, the Court must then decide whether Peregrine’s calculation of payout was made in accordance with the terms of the Agreements. 3|Page 102201969\V-2 HRB disputes Peregrine’s calculation of the alleged overpayments because Peregrine’s calculation of payout included gas transportation revenues owed to HRB under a completely separate and distinct Production Handling Agreement. Because these revenues were paid to HRB under a completely separate agreement, they should not have been credited as production revenues from the Test Well which was the subject of the Participation Agreement. Because such revenues are not production from the Test Well or the Subject Lease, they should not have been used to calculate payout of the Test Well drilled on the Subject Lease. If the Court holds that no contractual obligation to refund alleged overpayments exists, then: 1. Peregrine’s Motion must be denied because the only ground for recovery set forth in Peregrine’s Motion is breach of contract. 2. The two (2) year statute of limitations applicable to equitable actions will apply to Peregrine’s remaining money had and received claim and any damages alleged by Peregrine which occurred prior to July 8, 2014 will be time-barred. ARGUMENT Peregrine’s Motion severely confuses the issues before the Court with its emphasis on before payout (“BPO”) and after payout (“APO”) interests, joint interest billings (“JIB’s”), authority for expenditures (“AFE”) and the like. Boiled down to its simplest terms, Peregrine alleges that it mistakenly overpaid HRB $210,883.31 in production revenues from an offshore oil and gas lease because of an accounting mistake. Thus, assuming arguendo, that Peregrine’s calculations of payout are correct and Peregrine did, in fact, overpay revenues to HRB, the question before the Court is whether or not HRB’s failure to refund the amounts allegedly overpaid is a breach of contract or an equitable claim for money had and received. 4|Page 102201969\V-2 I. Peregrine’s breach of contract claims fail as a matter of law because there are no provisions in any of the Agreements which impose an obligation on the part of HRB to refund allegedly overpaid revenues. Under Texas law, a party does not breach a contract until it fails or refuses to do something it has, either expressly or impliedly, promised to do. Therefore, in order to determine whether or not Peregrine can sustain a cause of action for breach of contract, the Court must decide whether any of the provisions of the Participation Agreement, Operating Agreement, or Assignment amount to a promise by HRB sufficient to impose a contractual obligation upon HRB to refund overpaid revenues. If there are no contractual provisions obligating HRB to refund overpaid revenues, Peregrine cannot sustain a cause of action for breach of contract against HRB, and its claims sound in equity. A non-operator’s obligation to refund overpaid production revenues has been directly addressed by at least one Texas court in a case with nearly indistinguishable facts from those in this proceeding. Mobil Producing was previously analyzed in both of the HRB Motions and will not be fully re-visited here. For purposes of this Motion, it suffices to note that the court in Mobil Producing confirmed that where the contract contains no obligation on a party to suspend (refuse to accept) overpayments, a party has not breached the contract by its failure to refund said overpayments. None of the Agreements contain any provisions which can realistically be interpreted as an obligation to suspend or refund allegedly overpaid revenues. In Plaintiff’s Original Petition and its response to HRB’s First Set of Interrogatories, Peregrine confirmed that its breach of B & W Supply, Inc. v. Beckman, 305 S.W.3d 10, 16 (Tex. App.-Houston [1st Dist.] 2009) citing Mays v. Pierce, 203 S.W.3d 564, 575 (Tex. App.-Houston [14th Dist.] 2006, pet. denied); Examination Management Services, Inc. v. Kersh Risk Management, Inc., 367 S.W.3d 835 (Tex. App.-Dallas 2012) citing Case Corp. v. Hi–Class Bus. Sys. of Am., Inc., 184 S.W.3d 760, 769–70 (Tex. App.-Dallas 2005, pet. denied). Mobil Producing Texas & New Mexico, Inc. v. Cantor, 93 S.W.3d 916 (Tex. App.—Corpus Christi 2003, no pet.) Id. at 922 (Concurring Opinion by Justice Dorsey). See Plaintiff’s Original Petition, Paragraph 14. 5|Page 102201969\V-2 contract claim was based upon an alleged breach of (i) Paragraph 4 of the Participation Agreement and (ii) the terms of the Assignment. Unfortunately for Peregrine, an examination of these two (2) Agreements reveals no promise or contractual undertaking to refund allegedly overpaid revenues. The Participation Agreement obligated HRB to pay its share of the costs of drilling a well and constructing a platform,10 while the Assignment states only that Peregrine has the right to receive an assignment of its APO interests following Payout.11 Neither of these Agreements contain any provision even referencing overpaid revenues. Thus, according to Mobil Producing, HRB cannot be in breach of either of these Agreements. Rather than attempting to distinguish this case from Mobil Producing, Peregrine has simply changed its argument and become more creative12 in its interpretation of certain provisions of the Operating Agreement. Because no affirmative obligation to refund allegedly overpaid revenues can be found in any of the Agreements, Peregrine has been forced to attempt to imply such a contractual obligation. A. The Operating Agreement does not contain any provisions, either express or implied, which require HRB to refund allegedly overpaid revenues. As noted above, Peregrine originally claimed that HRB breached Paragraph 4 of the Participation Agreement and certain language in the Assignment by refusing to refund the allegedly overpaid revenues. However, instead of sticking to their original claims of breach, Peregrine’s Motion has left those out altogether and now attempts to use Articles 8 and 22, combined with the accounting procedures of Exhibit “C” to the Operating Agreement to imply See Peregrine’s Responses to HRB’s Interrogatories Nos. 1 & 2 attached to HRB’s Motion as Exhibit “D”. 10 Participation Agreement, Section 3, attached to HRB’s Motion as Exhibit “A”. 11 Page 2, third paragraph of the Assignment, attached to HRB’s Motion as Exhibit “B”. 12 In fact, Peregrine has gotten so creative that they are unable to cite a single authority in any context, let alone related to overpaid oil and gas revenues, which supports their position. 6|Page 102201969\V-2 an obligation imposed upon HRB.13 Unfortunately for Peregrine, its latest attempts to create an implied obligation are equally unpersuasive. Peregrine’s attempts to conjure up an obligation to refund alleged overpayments are entirely dependent on the meaning of one word: “charges”. Reduced to its essence, Peregrine’s argument is that HRB had an obligation to pay whatever “charges” Peregrine labeled as such in a JIB. The question for this Court is whether or not allegedly overpaid revenues are “charges due under the [Operating] Agreement.” If they are not, Peregrine has no case. Peregrine claims that HRB’s failure to refund allegedly overpaid revenues is a breach of Article 8.7.14 Article 8 of the Operating Agreement governs expenditures in general and Article 8.7 is a subset of Article 8 which provides in relevant part: 8.7 Unpaid Charges and Default. If a Party fails to pay the charges due under this Agreement…if a Party does not pay, when due, its share of the charges under this Agreement…the Party shall be in default…If a Party believes that Operator’s charges, or a portion thereof, are incorrect, that Party shall nevertheless pay the charges claimed by Operator and may notify Operator that the charges are in dispute… Additionally, Article 8.1 is an important provision in understanding the overall context of Article 8, and provides as follows: 8.1 Basis of Charge to the Parties. Subject to the other provisions of this Agreement, Operator shall pay all costs incurred under this Agreement, and each Party shall reimburse Operator in proportion to its Participating Interest. All charges, credits and accounting for expenditures shall be made and done pursuant to Exhibit “C”. [the Accounting Procedure] [emphasis added].15 Article 8.1 clearly establishes (i) that the “expenditures” governed by Article 8 are those costs incurred by the Operator under the Operating Agreement, and (ii) that the costs and expenditures incurred by the Operator under the Operating Agreement are subject to the 13 See Peregrine’s Motion at Paragraph 15. 14 See Peregrine’s Motion at Paragraph’s 26-27. 15 See Article 8.1of Operating Agreement (Exhibit “C”) to Participation Agreement, attached to HRB’s Motion as Exhibit “A”. 7|Page 102201969\V-2 accounting provisions of Exhibit “C” (the Accounting Procedure) attached to the Operating Agreement. The Operating Agreement is perfectly clear about what “charges” the Operator is allowed to bill to the non-operators and for which the non-operators are contractually obligated to pay: costs and expenditures. Likewise, it is the “charges” for costs and expenditures under the Operating Agreement that are governed by the Accounting Procedures in Exhibit “C” to the Operating Agreement. It cannot be reasonably argued that production revenues paid to non- operators are part of the costs or expenditures incurred under the Operating Agreement. Articles 22.3 and 22.5 are no help to Peregrine either. Article 22.3 does not establish any obligation on the part of HRB to refund overpayments. It states only that if HRB does not take their share of production in-kind, Peregrine has the right to take and market the production on HRB’s behalf. It also provides that Peregrine, as Operator, must pay the non-operators who did not take their gas in-kind for their share of revenues. An obligation on the part of the Operator to pay a party for its share of revenues does not impose a reciprocal obligation on the non-operator to either suspend or refund any overpayments mistakenly made by the Operator. Thus, Article 22.3 does not, in any way, impose an obligation on non-operators to refund overpaid revenues. Article 22.5 provides as follows: 22.5 Expenses of Delivery in Kind. A cost that is incurred by Operator in making delivery of a Party’s share of oil, gas, or condensate or disposing of same shall be paid by the Party. Like Article 8, Article 22.5 obligates HRB to pay for its share of the cost incurred by Peregrine in connection with marketing HRB’s share of gas production. It does not in any way obligate HRB to refund allegedly overpaid revenues generated from the sale of the gas. Each of the provisions relied upon by Peregrine in itsattempt to establish a promise or obligation on the part of HRB are inapplicable and misplaced. The provisions cited by Peregrine 8|Page 102201969\V-2 obligate HRB to pay for its share of costs and expenses of either producing or marketing the oil and gas from the Subject Lease and nothing more. No provision of any of the Agreements, including those referenced by Peregrine, suggests that overpaid revenues are a cost or expense associated with the marketing or production of oil and gas. Therefore, none of the provisions in any of the Agreements amounts to a promise or obligation to suspend or refund allegedly overpaid revenues and HRB cannot be found to have breached the contract. Further, the “adjustments” that Peregrine has attempted to effectuate in its JIB’s do not seek to account for overpaid or underpaid costs or expenses of any kind. In fact, Peregrine admits that HRB actually paid MORE than its share of the costs and expenses of drilling, production and marketing. Peregrine’s adjustments are nothing more than an attempt to collect revenues that it claims were mistakenly overpaid to HRB by labeling them as “charges” in a JIB. II. Peregrine’s calculation of payout and the amount of damages are incorrect, unreliable and fundamentally flawed and must not be awarded in a Summary Judgment. In the event that this Court does find that HRB had a contractual obligation to refund the allegedly overpaid production revenues, the next questions for the Court are (i) whether Peregrine’s payout calculations were performed in accordance with the terms of the Participation Agreement and the Assignment, and (ii) whether Peregrine’s calculations accurately establish the amount of Peregrine’s damages. The answer to both of these questions is clearly “no”. A. Peregrine’s calculation of payout of the Subject Lease is incorrect because it included revenues paid to HRB from sources other than the Subject Lease. Although the term “payout” is not actually defined in any of the Agreements, the various provisions of the Agreements referring to payout still provide guidance. The Operating Agreement does not address payout at all but certain provisions in both the Participation 9|Page 102201969\V-2 Agreement and the Assignment help to establish how the calculation of payout was contemplated. The Participation Agreement provides as follows: The Assignment will include a reservation by Peregrine of a 25% of 6/6ths working interest after payout the costs associated with drilling and completing the of the Initial Test Well, platform and facilities …[and] other costs associated with producing the Test Well. [emphasis added]16 Pursuant to the provision of the Participation Agreement referenced above, the Assignment contains the following reservation to Peregrine: …the right of Peregrine to receive after Payout an assignment from HRB of an undivided 25% working interest in the Subject Lease. [emphasis added] 17 “Subject Lease” is a defined term in the Assignment. It is specifically defined as the federal oil and gas lease covering Block A-155 Galveston Area, South Addition. The above provisions clearly establish that the calculation of payout was intended to be based upon HRB’s receipt of revenues from the Test Well in an amount sufficient for HRB to recover its costs of participating in the drilling of the Test Well and the installation of the associated platform and facilities on the Subject Lease. However, Peregrine’s calculation of payout included not only revenues from the sale of production from the Test Well, but also improperly included substantial pipeline transportation revenues received by HRB under a separate Production Handling Agreement.18 The Production Handling Agreement was entered into by and between HRB, Peregrine and the other working interest owners in Block A-155 with the oil and gas producers in an adjacent offshore block (Block A-133). The Production Handling Agreement provides for the processing of oil and gas produced from Block A-133 on the Block A-155 Platform and the transportation of such third 16 Participation Agreement § 4(a). 17 Page 2, third paragraph of the Assignment. 18 See Deposition of Danny Crawford, Pages 21-25 attached hereto as Exhibit A, and incorporated herein by reference. 10 | P a g e 102201969\V-2 party oil and gas through a pipeline operated by Peregrine that extends several miles from the Subject Lease to an interconnecting pipeline.19 Under the Production Handling Agreement, the producers in Block A-133 pay processing and transportation fees to HRB, Peregrine and the other working interest owners in Block A-155. The Production and Handling Agreement HRB entered into with the owners of the adjacent block was a totally separate agreement from the Participation Agreement and the Operating Agreement covering the Subject Lease. Therefore, the inclusion by Peregrine of the substantial revenues received by HRB under this separate contract in calculating payout was not proper under the Participation Agreement, and Peregrine’s calculation of payout is clearly incorrect. B. Peregrine’s calculation of damages are incorrect and fundamentally flawed because Peregrine credited itself with an APO interest in the transportation revenues as well as the Subject Lease. As noted above, under the terms of the Assignment, after payout, Peregrine reserved the right to receive an assignment of an undivided 25% of a 6/6 working interest in and to the Subject Lease 20 Additionally, the Participation Agreement ties each party’s interest to the Subject lease through various definitions. “Participant’s Net Revenue Interest” is defined as “a percentage of Participant’s Working Interest in the Lease” and “Lease” is defined as the lease covering Block A-155 (Subject Lease). Thus, according to both the Assignment and the Participation Agreement, Peregrine was entitled to an increased “back-in” or APO working interest in the Subject Lease only and was not entitled to an increased interest in the separate pipelines crossing numerous offshore lease blocks. However, in Peregrine’s calculation of allegedly overpaid revenues and damages, 19 See Exhibit 3 to the Deposition of Danny Crawford, which depicts the locations of Block A-133, Block A-155 and the pipeline that extends from Block A-155 to High Island area in Block A-536. 20 Page 2, third paragraph of the Assignment. 11 | P a g e 102201969\V-2 Peregrine has credited itself with an increased interest in the pipeline transportation revenues as well as the production from the Subject Lease. Because Peregrine’s “back-in” interest is clearly limited to an increased working interest in the Subject Lease, its calculation of damages using an increased interest in the revenues derived from the Production Handling Agreement are incorrect and fundamentally flawed. Both Peregrine’s payout calculations and, accordingly, its calculation of damages are fundamentally flawed and Peregrine’s Motion should be denied not only because Peregrine has failed to establish a cause of action for breach of contract (as opposed to a cause of action for money had and received), but also because Peregrine’s calculations are not in accordance with the terms of the contracts between the parties. 12 | P a g e 102201969\V-2 PRAYER HRB respectfully requests that the Court deny Peregrine’s Traditional Motion for Summary Judgment and enter an order granting HRB’s Motion for Partial Summary Judgment holding that (i) Peregrine’s First Cause of Action for breach of contract fails as matter of law and (ii) any overpayments allegedly made by Peregrine to HRB prior to July 8, 2014 are barred by the two year statute of limitations set out in Tex. Civ. Prac. & Rem. Code §16.003. Respectfully submitted, /s/ Barry F. Cannaday Barry F. Cannaday State Bar No. 03743500 barry.cannaday@dentons.com DENTONS US LLP 2000 McKinney Ave., Suite 1900 Dallas, Texas 75201 (214) 259-0900 - telephone (214) 259-0910 - facsimile Laura Gibson State Bar No. 07869350 laura.gibson@dentons.com DENTONS US LLP LyondellBassell Tower 1221 McKinney Street Suite 1900 Houston, Texas 77010 (713) 658-4631 - telephone (713) 739-0834 - facsimile ATTORNEYS FOR HRB OIL & GAS, LTD and VHPM, LLC 13 | P a g e 102201969\V-2 CERTIFICATE OF SERVICE I hereby certify that on December 28, 2016 a true and correct copy of the foregoing document was served via the Court’s electronic filing system and/or email to all attorneys of record as follows: Michael D. Jones Jones Gill LLP 6363 Woodway, Suite 1100 Houston, TX 77057 Email: mjones@jonesgill.com Attorneys for Peregrine Oil & Gas Ltd /s/ Barry F. Cannaday Barry F. Cannaday 14 | P a g e 102201969\V-2