Originally published by Charles Sartain.
Co-author Ethan Wood
Like breaking into CIA headquarters, sneaking into the Vatican, or hanging off the side of the Burj Khalifa, sometimes getting the deal done seems impossible. The key to any successful mission is planning for disastrous contingencies—be they rats in an air duct, malfunctioning suction gloves, or having to reach out to a third party to finance the bid you just won. Your mission—should you choose to accept it—is to learn how to avoid the fallout of an oil and gas acquisition gone bad by studying Pacific Energy & Mining Co. v. Fidelity Exp. & Prod. Co.
Fidelity and Pacific entered into an Asset Purchase Agreement whereby Fidelity would sell certain oil and gas assets to Pacific. Pacific, lacking the necessary funds, approached Norman to help finance the acquisition. Those parties entered into a Memorandum of Understanding setting out their intent that Norman would put up funding and own the assets and Pacific would act as operator. Fidelity agreed to the assignment of the APA from Pacific to Norman (required under the APA) so long as Pacific agreed to remain subject to its APA obligations. The deal quickly unraveled. Pacific sued Fidelity for breach of contract and Norman for breach of fiduciary duty of loyalty (among other claims).
Did Pacific have standing to sue Fidelity?
No. Fidelity’s argument was that Pacific did not have standing to sue for breach of contract because it assigned all of its rights in the APA to Norman. Pacific’s response was there was a “partial” assignment because Pacific retained its obligations. When one party to a contract assigns the contract, the assignor loses all rights to enforce the contract; however, the assignor is still liable to the other party unless released. Pacific’s retention of its APA obligations was a reflection of existing law. The assignment was not a “partial” assignment that entitled Pacific to sue Fidelity.
Were Pacific and Norman partners?
No. Pacific’s claim that there was an “oral partnership agreement”, entitling it to fiduciary protections, failed. To determine whether a partnership has been formed, Texas courts consider these factors:
Do both parties receive or have a right to receive a share of the profits?
Is there an expression of an intent to be partners?
Do both parties participate or have the right to participate in control?
Is there an agreement to share the losses or liabilities? and
Is there an agreement to contribute money or property?
Pacific was to receive a net profits interest as compensation for its services as operator, but under Texas law, “a share of profits paid as … compensation to an … independent contractor is not indicative of a partnership interest in the business.”
Intent to be partners
The MOU did not evidence intent to be partners. A JOA is not evidence of intent to form a broader relationship. What’s important is whether the parties hold themselves out to third parties as partners—and there was no evidence of that here.
Norman would’ve had complete discretion in how to develop the assets and Pacific would only have rights as operator under the JOA.
Sharing of losses
There might have been loss sharing for pipeline connections, but this was not evidence of an agreement to share losses
Contributions to the partnership
Pacific’s assignment of its rights under the APA to Norman could have been a “contribution,” but evidence of only one factor in the analysis is insufficient to prove the existence of a partnership. Considering all factors, no partnership existed.
Pacific made other arguments, all of which were untimely. Trial lawyers: See the decision for lessons about pleading your case.
This message may self-destruct in five seconds, but not the musical interlude. Good luck.
Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.
Original author: Charles Sartain