Texas Supreme Court Allows Enforcement of a JOA Debt After Foreclosure | Gray Reed
In Steelhead Midstream Partners, LLC v. CL III Funding Holding Company, LLC, the Texas Supreme Court authorized a pipeline owner’s breach-of-contract claim—alleging a co-owner used foreclosure to avoid cost-sharing obligations under a joint operating agreement. The claim was not an impermissible collateral attack against a judgment allowing a foreclosure because the foreclosure suit did not adjudicate the parties’ contractual cost-sharing obligations.
Cost-Sharing, Foreclosure, and Breach of Contract
Steelhead and CLIII each owned an interest in an oil and gas pipeline project, subject to a JOA with a 50/50 cost-sharing arrangement. CL III’s predecessor-in-interest defaulted on its share of construction costs, resulting in a mineral contractor’s lien. CL III purchased the lien, becoming both a 50% owner of the pipeline and the lienholder against it.
CL III sued to foreclose on the lien and to compel Steelhead to pay the outstanding construction debt. Steelhead counterclaimed, asserting CL III breached the JOA by failing to pay its share of the construction costs that gave rise to the lien. In Steelhead’s view, CL III owed the remaining construction debt inherited from its predecessor and could not collect that debt from Steelhead, whose predecessor had already paid its share of the construction costs.
CL III moved to dismiss Steelhead’s counterclaim for lack of jurisdiction due to related bankruptcy proceedings. The court granted the motion and ordered foreclosure of Steelhead’s interest. Steelhead paid the judgment and did not appeal.
Prior to final judgment in the foreclosure suit, Steelhead filed a separate breach of contract suit, alleging that CL III’s failure to pay its share of the construction debt resulted in the foreclosure of Steelhead’s interest in the pipeline.
The court of appeals concluded that the contract claim constituted an impermissible collateral attack on the foreclosure judgment, which had definitively determined the status of the debt and the parties’ rights under the JOA. The Texas Supreme Court granted review to address the collateral attack issue.
The Supreme Court: No Impermissible Collateral Attack
The Court reversed. Steelhead’s breach of contract claim was not an impermissible collateral attack on the final judgment in the foreclosure suit.
The foreclosure proceedings focused exclusively on the construction debt and the lien’s enforceability. The Court reasoned that determining who owed the construction debt, to whom it was owed, and whether a lien securing the debt is enforceable, is conceptually and legally distinct from determining the parties’ contractual cost-sharing obligations under the JOA (the contractual debt). As such, Steelhead’s breach of contract claim could be litigated independently.
“Properly understood,” the Court explained, “Steelhead’s [breach-of-contract] lawsuit seeks to establish not that the result of the foreclosure litigation was incorrect, but that the result of the foreclosure litigation triggers contractual obligations CL III owes to Steelhead.”
The Court also noted that Steelhead attempted to raise its breach-of-contract claim as a counterclaim in the foreclosure suit, but CL III successfully argued the foreclosure court lacked jurisdiction. Thus, the Supreme Court concluded, it would be unfair to bar Steelhead from litigating its breach of contract claim in a separate action after CL III had prevented it from doing so in the foreclosure suit.
Your musical interludes: fiddles, pipes banjos … reels, jigs, and two steps … from all over.
South Carolina (my guess)
Ireland (or Scotland?)
[View source.]
