Sojitz Energy Venture, Inc. v. Union Oil Co. of Cal.

Full title: SOJITZ ENERGY VENTURE, INC., Plaintiff, v. UNION OIL COMPANY OF…

Court: United States District Court, S.D. Texas, Houston Division.

Date published: Apr 29, 2019

394 F. Supp. 3d 687 (S.D. Tex. 2019)

Opinion

Civil Action No. H-17-2941

2019-04-29

SOJITZ ENERGY VENTURE, INC., Plaintiff, v. UNION OIL COMPANY OF CALIFORNIA, Defendant.

DAVID HITTNER, United States District Judge

ORDER

Pending before the Court are Plaintiff's Motion for Summary Judgment (Document No. 20) and Defendant Union Oil Company of California's Cross-Motion for Summary Judgment (Document No. 21). Having considered the motions, submissions, and applicable law, the Court determines Plaintiff's motion should be granted and Defendant's motion should be denied.

This is an oil and gas case concerning the cost of decommissioning two properties ("Properties") located in the Outer Continental Shelf. Defendant Union Oil Company of California ("Union") was the sole lessee and record title owner of the Properties, leasing them from the United States. Union assigned shallow operating rights to ATP Oil & Gas Corporation ("ATP") pursuant to a written agreement. On May 6, 2003, ATP assigned 20% of its shallow operating rights in the Properties to Plaintiff Sojitz Energy Venture Inc. ("Sojitz") pursuant to a written agreement. On September 30, 2009, Sojitz reassigned its 20% shallow operating rights in the Properties back to ATP pursuant to a written agreement. In 2012, ATP filed for bankruptcy. On October 29, 2013, the Bureau of Safety and Environmental Enforcement ("BSEE")¹ sent Sojitz a letter ordering it to decommission the Properties. On June 20, 2014, BSEE sent Union a letter also ordering it to decommission the Properties. Sojitz paid the entire cost of decommissioning the Properties.

1 BSEE is a United States agency charged with ensuring environmental protection related to the offshore energy industry.

Based on the foregoing, on October 2, 2017, Sojitz filed this lawsuit against Union asserting claims for equitable subrogation and a declaratory judgment, or alternatively, contribution, unjust enrichment, or quantum meruit. On October 29, 2018, the Court referred all pretrial matters in the case to United States Magistrate Judge Dena Palermo pursuant to 28 U.S.C. § 636(b)(1)(B).² On January 17, 2019, Judge Palermo issued a report and recommendation on the parties' cross motions for summary judgment ("Report and Recommendation").³ The Report and Recommendation recommends that Sojitz's motion be granted and Union's motion be denied. On January 31, 2019, Union timely filed objections to the Report and Recommendation.⁴

2 Order of Referral of All Matters , Document No. 27.

3 Report and Recommendation on Cross Motions for Summary Judgment , Document No. 28.

4 Defendant Union Oil Company of California's Objections to Magistrate Judge's Report and Recommendations , Document No. 32.

Objections to a magistrate judge's report and recommendation are reviewed de novo. Fed. R. Civ. P. 72(b). The Court has reviewed the parties' motions for summary judgment, the evidence submitted by the parties, the Report and Recommendation, and Union's objections to the Report and Recommendation. The Court finds the Report and Recommendation correctly interprets the contracts in dispute and properly finds that Sojitz is entitled to equitable subrogation. The Court therefore finds Union's objections should be overruled and the Report and Recommendation is adopted in its entirety as this Court's Order.

Accordingly, the Court hereby

ORDERS that Defendant Union Oil Company of California's Objections to Magistrate Judge's Report and Recommendations (Document No. 32) are OVERRULED . The Court further

ORDERS that Report and Recommendation on Cross Motions for Summary Judgment (Document No. 28) is ADOPTED as this Court's Order. The Court further

ORDERS that Plaintiff's Motion for Summary Judgment (Document No. 20) is GRANTED . The Court further

ORDERS that Defendant Union Oil Company of California's Cross-Motion for Summary Judgment (Document No. 21) is DENIED . The Court further

ORDERS that Plaintiff Sojitz Energy Venture, Inc. shall recover the sum of $8,403,909.38 from Defendant Union Oil Company of California. The Court will issue a separate final judgment.

REPORT AND RECOMMENDATION ON CROSS MOTIONS FOR SUMMARY JUDGMENT

Dena Hanovice Palermo, United States Magistrate Judge

Before the Court are the Parties’ cross motions for summary judgment.¹ Plaintiff Sojitz Energy Venture, Inc. ("Sojitz") filed a motion for summary judgment on its claims for subrogation, contribution, quantum meruit, and unjust enrichment as well as on Defendant’s counterclaims and affirmative defenses.² ECF No. 20. Defendant Union Oil Company of California ("Union") filed a cross motion for summary judgment on Plaintiff’s claims. ECF No. 21-22. Having considered the record, containing factual evidence and legal authorities, the Court recommends that Sojitz’s motion should be granted and Union’s motion should be denied.

1 On October 29, 2018, the District Judge referred this case for all pretrial purposes. Order, ECF No. 27.

2 Defendant filed its opposition in consolidation with its cross motion for summary judgment. ECF Nos. 21-22. Plaintiff filed its reply in consolidation with its opposition to Defendant’s cross motion for summary judgment. ECF No. 25. Defendant filed a reply. ECF No. 26.

I.

FACTUAL OVERVIEW

This dispute arises out of the liability for the decommissioning of two properties located in the Outer Continental Shelf ("OCS") in the Gulf of Mexico. This includes two oil and gas fields—Garden Banks 142 ("GB 142") and Garden Banks 186 ("GB 186"). Ex. 1, ECF No. 1-1; Ex. 2, ECF No. 1-2. Sojitz asserted claims for declaratory judgment and subrogation, or alternatively, contribution, quantum meruit, or unjust enrichment. ECF No. 1. Union asserted counterclaims and affirmative defenses seeking declaratory judgment and alleging breach of a contract to which it is a third-party beneficiary, that indemnity obligations are covenants running with the land, and that the existence of express contracts bar Plaintiff’s equitable claims. ECF No. 18. The essential facts are undisputed.

A. Union Became The Lessee Of Garden Banks 142 And 186.

Effective December 1, 1999, Union became the sole lessee and record title owner of both GB 142 and GB 186 ("Leases"), leasing them from the United States’ Minerals Management Service ("MMS").³ Ex. 1 at 2, ECF No. 1-1; Ex. 2 at 2, ECF No. 1-2. At all times relevant to this dispute, Union remained the sole lessee and record title owner of the Leases.

3 Effective May 19, 2010, MMS was dissolved and ultimately divided into three separate entities. The Bureau of Ocean Energy Management ("BOEM") and Bureau of Safety and Environmental Enforcement ("BSEE") became two of the successor entities. See Report and Recommendation on Cross Motions Regarding Choice of Law, Total E&P USA, Inc. v. Marubeni Oil and Gas, Inc. , No. 4:16-CV-2671 (S.D. Tex. June 4, 2018), ECF No. 159 at 7, report and recommendation adopted , No. 4:16-CV-2671 (S.D. Tex. July 12, 2018), ECF No. 168.

B. Union Assigned Shallow Operating Rights To ATP.

Effective November 30, 2000, Union and ATP Oil & Gas Corporation ("ATP") entered into a written Agreement to Acquire Operating Rights ("Union Agreement"). Ex. 3, ECF No. 1-3. Union assigned to ATP partial operating rights in the Leases, extending from the surface of the earth to 6500’ total vertical depth. Id. at ¶ 2. Union retained its operating rights to depths below 6500’, and the agreement prohibited ATP from plugging and abandoning any well on the Leases without first giving Union the option to take over to explore and develop its deep rights. Id. at ¶¶ 11, 13. Union also retained an overriding royalty interest ("ORRI") on any oil, gas, or other hydrocarbons produced from the Leases. Id. at ¶ 3.

C. ATP Assigned 20% Of Its Shallow Operating Rights To Sojitz.

Effective May 6, 2003, ATP and Sojitz—at the time called NI Energy Venture, Inc.—entered into a written "Participation Agreement." Ex. 4, ECF No. 1-4. ATP assigned to Sojitz 20% of its operating rights interest in the Leases, from the surface to 6500’ total vertical depth, subject to Union’s retained rights under the Union Agreement. Id. at ¶ 3. On November 19, 2003 and March 16, 2004, the MMS approved ATP’s assignments to Sojitz. Ex. 6, ECF No. 1-6. ATP and Sojitz also entered into an Offshore Operating Agreement ("OOA"). Ex. 5, ECF No. 1-5.

D. Sojitz Reassigned Its 20% Interest Back To ATP.

Six years later, effective September 30, 2009, Sojitz reassigned its 20% operating rights interest back to ATP, which MMS approved. Ex. 7, ECF No. 1-7. Sojitz and ATP entered into a "Purchase and Sale Agreement," reassigning Sojitz’s interests back to ATP. Art. 2.1, Ex. 8 at 9, ECF No. 1-8. Pursuant to that agreement, Sojitz paid ATP $4,750,000 in consideration. Art. 2.2, Ex. 8 at 9, ECF No. 1-8. The Purchase and Sale Agreement also included a provision releasing Sojitz from all liability for plugging and abandonment. Art. 11.3(b), Ex. 8 at 21, ECF No. 1-8.

E. Union And Sojitz Were Ordered To Decommission The Properties.

In 2012, ATP filed for bankruptcy and notified the BSEE that it would no longer perform any required maintenance or decommissioning activities related to the Leases. Rimel Aff. ¶ 9, ECF No. 20-1; Weaver Decl. ¶ 6, ECF No. 22-1. On October 29, 2013, BSEE sent Sojitz a letter ordering it to decommission GB 142 and GB 186. Ex. A-1, ECF No. 22-1. On June 20, 2014, BSEE likewise sent Union a letter ordering it to decommission GB 142 and GB 186. Ex. 9, ECF No. 1-9; Ex. A-2, ECF No. 22-1; Weaver Decl. ¶ 9, ECF No. 22-1.

F. Sojitz Performed Decommissioning.

After both parties received the letters, Sojitz sent a letter to Union on September 12, 2014 to confer regarding their mutual responsibility to the government to plug and abandon GB 142 and GB 186 and to reach agreement regarding allocation of costs. Ex. B, ECF No. 22-2. Union contended Sojitz was wholly responsible for satisfying decommissioning, which Sojitz disputed. Ex. D, ECF No. 22-4; Ex. C, ECF No. 22-3. In ongoing discussions, Union estimated it would cost $32.2 million for well abandonment and structure decommissioning. Rimel Aff. ¶ 11, ECF No. 20-1. Sojitz estimated it could perform decommissioning operations for a fraction of Union’s estimate. Weaver Decl. ¶ 12, ECF No. 22-1. While the parties could not reach agreement on the allocation of costs, they agreed that Sojitz would be designated as the operator for decommissioning and notified BSEE accordingly. Id. ¶ 11; Rimel Aff. ¶ 12, ECF No. 20-1; Ex. A-3, ECF No. 22-1. Sojitz ultimately performed the decommissioning of the properties at issue for $10,016,698.35. Rimel Aff. ¶ 16, ECF No. 20-1.

Sojitz received $1,612,788.97 from a trust fund established in the ATP bankruptcy to handle outstanding decommissioning costs. Id. ¶ 16. The net amount Sojitz paid for decommissioning is $8,403,909.38. Id. Union and ATP stipulated that this amount was reasonable and necessary. ECF No. 14.

II.

SUMMARY JUDGMENT STANDARD

Rule 56 of the Federal Rules of Civil Procedure provides for the entry of summary judgment against a party who fails to make a sufficient showing of the existence of an element essential to its case and on which it will bear the burden at trial. Celotex Corp. v. Catrett , 477 U.S. 317, 322 (1986) ; Curtis v. Anthony , 710 F.3d 587, 594 (5th Cir. 2013) ; Little v. Liquid Air Corp. , 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc). Summary judgment "should be rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(a) ; Celotex , 477 U.S. at 322-23.

"Initially, the movant bears the burden of presenting the basis for the motion and the elements of the causes of action upon which the nonmovant will be unable to establish a genuine dispute of material fact." Stewart v. U.S. Bank Nat’l. Ass’n , 107 F. Supp. 3d 705, 707 (S.D. Tex. 2015). "On summary judgment, the moving party is not required to present evidence proving the absence of a material fact issue; rather, the moving party may meet its burden by simply ‘pointing to an absence of evidence to support the nonmoving party’s case.’ " Boudreaux v. Swift Transp. Co., Inc. , 402 F.3d 536, 544 (5th Cir. 2005) (quoting Armstrong v. Am. Home Shield Corp. , 333 F.3d 566, 568 (5th Cir. 2003) ). "The burden then shifts to the nonmovant to come forward with specific facts showing there is a genuine dispute for trial." Stewart , 107 F. Supp. 3d at 707. "A dispute about a material fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. at 707 (internal quotation marks and citation omitted).

The Court is not required to accept the nonmovant’s conclusory allegations, speculation, and unsubstantiated assertions which are either entirely unsupported, or supported by a mere scintilla of evidence. Chaney v. Dreyfus Serv. Corp. , 595 F.3d 219, 229 (5th Cir. 2010) (citing Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co. , 336 F.3d 410, 413 (5th Cir. 2003) ); accord Little , 37 F.3d at 1075. " ‘[A] complete failure of proof concerning an essential element of the nonmoving party’s case necessarily renders all other facts immaterial,’ and summary judgment as a matter of law must be granted." Brown v. United States Postal Inspection Serv. , 206 F. Supp. 3d 1234, 1242 (S.D. Tex. 2016) (quoting Celotex , 477 U.S. at 322–23 ).

III.

BOTH PARTIES MOVED FOR SUMMARY JUDGMENT ON PLAINTIFF’S CLAIMS

A. Subrogation.

Both parties moved for summary judgment on Plaintiff’s subrogation claim. ECF No. 20 at 5-6; ECF No. 22 at 8-11.⁴ To determine whether Plaintiff is entitled to relief under subrogation, the Court must first look to what the government regulations require regarding the accrual of decommissioning obligations of the parties, and what the applicable contracts in this case require.

4 Union did not dispute that it owed a joint and several obligation to the government as a record title owner to decommission the property; it only disputed that it is obligated to pay Sojitz for any of the decommissioning costs incurred. ECF No. 22 at 17.

1. Both Union and Sojitz accrued decommissioning obligations to the government.

The Code of Federal Regulations prescribes obligations that accrue on oil and gas leases and requires lessees and operators to bear a joint and several responsibility to decommission facilities on such leases when wells are no longer being used.⁵ See generally 30 C.F.R. § 250.1700 et seq. ; 30 C.F.R. § 556.604 et seq.

5 "Absent regulation, few companies would agree or contract to spend the money—usually in the hundreds of thousands of dollars—required to decommission an oil producing property once its useful life is over." Total E&P USA, Inc. v. Marubeni Oil & Gas (USA), Inc. , No. 4:16-CV-2671, 2018 WL 4599842, at *9 n.25 (S.D. Tex. June 28, 2018) (citations omitted), report and recommendation adopted , 2018 WL 4042612 (S.D. Tex. Aug. 24, 2018).

a. Union accrued decommissioning obligations to the government as the lessee, as owner of deep operating rights, and because ATP defaulted.

Federal regulations define when decommissioning obligations accrue and to whom. "Lessees and owners of operating rights are jointly and severally responsible for meeting decommissioning obligations for facilities on leases ... as the obligations accrue and until each obligation is met." 30 C.F.R. § 250.1701(a). Decommissioning obligations accrue when a party is or "become[s] a lessee or the owner of operating rights of a lease on which there is a well that has not been permanently plugged...." 30 C.F.R. § 250.1702(d) (emphasis added).

At all times relevant to this case, Union was the sole lessee of the properties. Moreover, Union never assigned all of its operating rights. Instead, Union retained operating rights at a depth below 6500’,⁶ and reserved the right to reacquire operating rights in the event ATP decided to cease production or plug the well. Ex. 3 at 4-5 ¶ 11, ECF No. 1-3. Accordingly, Union accrued decommissioning obligations.

6 "[W]hatever depth division(s) has not been subleased, remains part of the lessee/sublessor’s record title interest." 30 C.F.R. § 556.604(c) (2016). "A record title owner owns operating rights to the lease, unless and until he or she severs the operating rights by subleasing them to someone else." 30 C.F.R. § 556.604(b)(1) (2016).

In addition, in 2016, BOEM clarified preexisting regulations that imposed decommissioning obligations on record title owners:

Every current and prior record title owner is jointly and severally liable, along with all other record title owners and all prior and current operating rights owners, for compliance with all non-monetary terms and conditions of the lease and all regulations issued under [the Outer Continental Shelf Lands Act], as well as for fulfilling all non-monetary obligations, including decommissioning obligations, which accrue while it holds record title interest.

30 C.F.R. § 556.604(d).⁷ This affirms that Union was liable for decommissioning as the lessee, record title owner of the Leases, and owner of the deep operating rights.

7 In 2016, BOEM published final rules regarding oil and gas operations in the OCS, following MMS’s reorganization. See Leasing of Sulfur or Oil and Gas in the Outer Continental Shelf ("Final Rule"), 81 FR 18112-01, 2016 WL 1213759, at *18112 (Mar. 30, 2016). "This final rule reorganize[d] and reorder[ed] the parts of the BOEM regulations concerning leasing, add[ed] new sections to standardize or clarify practices ..., and eliminate[d] redundant or otherwise unnecessary text." Id. The "final rule also update[d] and clarifie[d] processes required by legislation enacted since BOEM’s regulations were last amended...." Id. (emphasis added). Final Rule § 556.604 replaced what was previously codified at 30 C.F.R. §§ 550.146, 556.62, and 556.64. Id. at *18115. Section 556.604(d) was derived from § 256.605(a) in MMS’s 2009 proposed rules. Id. Proposed rule § 256.605(a) stated that record title owners

are responsible for all performance on the lease.... If there is more than one record title or operating rights owner, each of you are jointly and severally liable for non-monetary lease obligations.... You are also jointly and severally liable for plugging and abandonment obligations that accrue while you hold record title interest.

Leasing of Sulphur or Oil and Gas and Bonding Requirements in the Outer Continental Shelf ("Proposed Rule"), 74 FR 25177-02, 2009 WL 1455738, at *25197 (May 27, 2009). Proposed Rule § 256.605(a) was a "[n]ew section to clarify obligations of record title owners." Id. at *25180 (emphasis added). Thus, Proposed Rule § 256.605(a) and Final Rule § 556.604(d) did not create new obligations on record title owners, but merely clarified existing obligations. In contrast, wholly new obligations were identified as "[n]ew requirement[s]...." See id. at *25178.

In 2016, BOEM also clarified that if an operator fails to perform decommissioning as required by the government, the government can look to any record title owner or predecessor in interest to conduct decommissioning:

(a) A record title holder who subleases operating rights remains liable for all obligations of the lease, including those obligations accruing after BOEM’s approval of the sublease....

(b) Neither the sublease of operating rights, nor subsequent assignment of those rights by the original sublessee, nor by any subsequent assignee of the operating rights, alters in any manner the liability of the record title holder for nonmonetary obligations.

(c) Upon approval of the sublease of the operating rights, the sublessee and subsequent assignees of the operating rights become primarily liable for monetary obligations, but the record title owner remains secondarily liable for them....

30 C.F.R. § 556.711.⁸ Under this regulation, because ATP defaulted, Union was responsible for decommissioning and the government called on Union to do it.⁹ Ex. 9, ECF No. 1-9; Ex. A-2, ECF No. 22-1; Weaver Decl. ¶ 9, ECF No. 22-1.

8 Final Rule §§ 556.711(a) and (b) replaced what was previously codified at 30 C.F.R. § 556.64. Final Rule, 2016 WL 1213759, at *18135. They were derived from § 256.616 in the Proposed Rules, and

retain all of proposed rule section 256.616 and make clear the extent of the liability retained by a party who assigns its record title interest. BOEM received a comment on proposed rule section 256.616 requesting that the final sentence be deleted because it was ambiguous. BOEM agrees with the comment and has deleted the sentence. The scenario it addressed in the proposed rule has been addressed without ambiguity in final rule section 556.711(a).

Id. Proposed Rule § 256.616 stated:

As assignor, you are liable for all obligations, monetary and non-monetary, that accrued under your lease before MMS approves your assignment. Our approval of the assignment does not relieve you of these accrued obligations if your assignee, or any subsequent assignee, fails to perform. In addition, MMS may require you to bring the lease into compliance to the extent the obligation accrued before approval of your assignment, if your assignee or any subsequent assignee, fails to perform any obligation under the lease. You remain liable for all obligations if you create a sublease of operating rights only.

Proposed Rule, 2009 WL 1455738, at *25198. Proposed Rule § 256.616 "simplified language" previously codified at 30 C.F.R. §§ 256.62(d) and (f). Id. at *25180. Thus, this too did not represent a new obligation, but merely clarified and simplified existing obligations.

9 To the extent the 2016 regulations post-dated the events underlying this litigation, they did not impose new obligations but merely clarified existing law. Regulations at the time imposed decommissioning obligations on record title owners if an assignee defaulted. See 30 C.F.R. § 256.62(d) (2011) ("The Regional Director’s approval of the assignment does not relieve [the assignor] of accrued lease obligations that your assignee, or a subsequent assignee, fails to perform."); 30 C.F.R. § 256.62(f) (2011) ("If [an] assignee, or a subsequent assignee, fails to perform any obligation under the lease..., the Regional Director may require [the assignor] to bring the lease into compliance to the extent that the obligation accrued before [approval] of the assignment...."). Indeed, the BSEE called on Union to decommission the properties in 2014 based on Union’s status as the record title owner, before the 2016 regulations went into effect.

Decommissioning obligations likewise accrue any time a party "[d]rill[s] a well" or "[i]nstall[s] a platform, pipeline, or other facility." 30 C.F.R. § 250.1702. Union argued that it did not do any of the above, that no well was drilled nor any pipeline installed until after it assigned operating rights to ATP, that ATP and Sojitz conducted these activities, and therefore Union did not accrue decommissioning obligations before it assigned operating rights to ATP. ECF No. 22 at 15. However, because Union remained the sole lessee and retained deep operating rights, Union accrued decommissioning obligations to the government. Because ATP defaulted, Union was not relieved of any of its obligations.

b. Sojitz accrued decommissioning obligations to the government as a former operating rights co-lessee.

Because Sojitz held an operating rights interest, including while the well was spud and oil was produced,¹⁰ it incurred decommissioning obligations. 30 C.F.R. §§ 250.1701(a), 250.2702(d). Sojitz did not dispute that it owed decommissioning obligations to the government, only that it must bear the cost. ECF No. 20 at 15, 17-18. Indeed, the government called on both Sojitz and Union to decommission the properties. Ex. A-1, ECF No. 22-1; Ex. 9, ECF No. 1-9; Ex. A-2, ECF No. 22-1; Weaver Decl. ¶ 9, ECF No. 22-1. Thereafter, Union and Sojitz jointly agreed— without waiving their rights against each other¹¹ —that Sojitz would be designated as the operator to perform decommissioning since it was able to do it at a lower cost. Ex. 3, ECF No. 22-1; Weaver Decl. ¶ 12, ECF No. 22-1.

10 Ex. 4, ECF No. 1-4; Weaver Decl. ¶ 5, ECF No. 22-1; Ritter Decl. ¶ 3, ECF No. 22-5.

11 Sojitz reserved its right to bring claims against Union for reimbursement. Rimel Aff. ¶ 12, ECF No. 20-1.

2. Under the contracts, Sojitz agreed to assume ATP’s obligations to Union for its 20% share and was subsequently released.

"The regulations govern the parties’ joint and several liabilities vis-à-vis the government, not amongst themselves." Total , 2018 WL 4599842, at *9 (quoting Fruge ex rel. Fruge v. Parker Drilling Co. , 337 F.3d 558, 563 (5th Cir. 2003) ). "[P]arties will always be jointly and severally liable to the government for the cost of decommissioning, no matter what their contract provides, but they are free to reallocate the sharing of costs among themselves in their contract." Id. (citing Fruge , 337 F.3d at 563 nn.5, 6 ). While there is no contract directly between Union and Sojitz, the Court will consider any other contracts that existed to determine who must bear the cost of decommissioning. The Court examined the Union Agreement between Union and ATP, and the agreements between ATP and Sojitz (the Participation Agreement, OOA, and Purchase and Sale Agreement).

The interpretation of an unambiguous contract is a legal question for the court. See Total , 2018 WL 4599842, at *5 (citing Boudreaux v. Unionmutual Stock Life Ins. Co. of Am. , 835 F.2d 121, 123 (5th Cir. 1988) ). Here, neither party contended the contracts are ambiguous.¹² Under general Texas rules of contract interpretation,¹³ in an unambiguous contract, "we construe [its terms] according to the plain meaning of their express meaning and enforce them as written." Lutfak v. Gainsborough , No. 1-15-1068-CV, 2017 WL 2180716, at *3 (Tex. App.—Houston [1st Dist.] May 18, 2017, no pet.) (citing Chapman v. Abbot , 251 S.W.3d 612, 616-17 (Tex. App.— Houston [1st Dist.] 2007, no pet.) ). The Court must discern the intent of the contracting parties. Id. (citing Seagull , 207 S.W.3d at 345 ). "To achieve this objective, courts should examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless." Id. (quoting Valence Operating Co. v. Dorsett , 164 S.W.3d 656, 662 (Tex. 2005) ).

12 Although the parties may construe their obligations under the applicable contracts differently, "a contract is not ambiguous merely because the parties disagree on its meaning." Guggenheim Corporate Funding, LLC v. Valerus Compression Servs., L.P. , 465 S.W.3d 673, 681 (Tex. App.— Houston [14th Dist.] 2015, pet. denied) (quoting Seagull Energy E & P, Inc. , 207 S.W.3d 342, 345 (Tex. 2006) ). "[A]n ambiguity arises when an agreement is susceptible to more than one reasonable meaning after application of established rules of construction." Id. (quoting Univ. Health Servs., Inc. v. Renaissance Women’s Group, P.A. , 121 S.W.3d 742, 746-47 (Tex. 2003) ).

13 Jurisdiction in this case is predicated on the Outer Continental Shelf Lands Act. 43 U.S.C. § 1333. The applicable law is that of the state adjacent to the site under dispute. Id. Plaintiff contends, and Defendant does not dispute, that Texas is the adjacent state. ECF No. 20 at 18. Therefore, Texas law applies.

a. Union and ATP’s Agreement.

The Union Agreement, under which Union assigned shallow operating rights to ATP, required ATP to assume all costs of decommissioning and to indemnify Union for all liability associated with its operations:

ATP will indemnify and hold Union harmless from any and all risk or liability associated with ATP’s operations on the Leases. All operations conducted under the terms of this Agreement, shall be free of any cost and/or liability of any kind or character to Union, and all risk, liability, costs or expenses incurred in connection with drilling, testing, completing, and equipping said well or wells or plugging or abandoning said well or wells shall be borne solely by ATP.

Ex. 3 at ¶ 7, ECF No. 1-3. The Union Agreement permitted ATP to assign its interest to another entity in whole or in part. The assignee was required assume the same obligations under the Union Agreement. However, despite any assignment, ATP remained liable for 100% of the liabilities:

ATP agrees that it will not assign, sublease, or transfer, in whole or part, any rights acquired herein without requiring its assignment, sublessees, and transferees to expressly assume all obligations owed to Union under the terms of this Agreement, and all such pertinent terms shall be incorporated into any and all future instruments translative of title. Any assignment, sublease, or transfer executed

in contravention of this provision shall be null and void. Notwithstanding ATP’s right to assign all or part of the interest acquired, or to be acquired hereunder to third parties, ATP shall remain fully responsible and liable for fulfillment of all the obligations and liabilities imposed herein, and for compliance with all terms and conditions established herein , whether express or implied. ....

Id. at ¶ 8 (emphasis added). The Union Agreement did not require Union’s consent for ATP to assign any of its interest. Nor did it address ATP’s ability to release an assignee from liability upon reassignment back to it, and therefore did not require Union’s consent.

The Union Agreement required assignees to assume "all" obligations to Union under the agreement. Union argued that this language required an assignee to assume 100% of ATP’s liabilities even when the assignee only acquired a partial interest. ECF No. 22 at 20. Sojitz argued it acquired only a 20% interest in the properties and was required to assume only its proportionate share of ATP’s liabilities as spelled out in its contracts with ATP. ECF No. 25 at 11-12. The Court agrees with Sojitz.

The language in the Union Agreement was not specific enough to require every assignee to assume 100% of ATP’s obligations when ATP only assigned part of its interest. Likewise, the Union Agreement did not require all assignees—other than ATP—to be 100% liable forever. It would be highly unusual and make no economic sense for a party to acquire a proportionate share of a property but be liable for 100% of all obligations for the entire property. "We will not construe contracts to produce an absurd result when a reasonable alternative construction exists." Ferrant v. Indep. Order of Foresters , No. 2-16-98-CV, 2017 WL 218287, at *4 (Tex. App.—Fort Worth Jan. 19, 2017, pet. denied) (quoting Markel Ins. Co. v. Muzyka , 293 S.W.3d 380, 387 (Tex. App.—Fort Worth 2009, no pet.) ).

The contract did not go as far as Union contended. Union’s interpretation requires more explicit language for an assignee who acquired a part of the operating rights interest to assume 100% of all liabilities, including for decommissioning. The Court will "not remake their contract by reading additional provisions into it." Tex-Fin, Inc. v. Ducharne , 492 S.W.3d 430, 440 (Tex. App.—Houston [14th Dist.] 2016, no pet.) (quoting Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd’s London , 327 S.W.3d 118, 126 (Tex. 2010) ). "The parties’ intent is governed by what is written in the contract, not by what one side contends they intended but failed to say." Id. (citing Gilbert Tex. Constr. , 327 S.W.3d at 127 ).

b. ATP and Sojitz’s Participation Agreement.

The Participation Agreement, under which ATP assigned 20% of its interest to Sojitz, was subject to and complied with the Union Agreement, as set forth in Exhibit A to the Participation Agreement:

That certain Agreement to Acquire Operating Rights ... by and between Union Oil Company of California and ATP Oil & Gas Corporation is incorporated by reference for all purposes, and, with respect to the Assigned Premises , Assignee hereby specifically assumes and undertakes the obligations, liabilities, and indemnifications contained in the Acquisition Agreement. In the event of a conflict between the terms and provisions of this Assignment of Operating Rights and the terms and provisions of the Acquisition Agreement, the terms

and provisions of the Acquisition Agreement shall control.

Ex. 4 at 13 ¶ 1, ECF No. 1-4 (emphasis added). Moreover, the Participation Agreement specified that Sojitz was liable only for its proportionate share:

Assignee agrees to assume and be liable for its proportionate share of all obligations pertaining to the Assigned Premises , including but not limited to the obligation to bear its share of the cost, risk and expense to plug and abandon any well or wells, pipelines, flowlines, platforms or facilities pertaining to the Assigned Premises .

Id . at 13 ¶ 4 (emphasis added).¹⁴

14 These provisions were reiterated in ATP’s assignment of 20% of its operating interest to Sojitz, as filed with the government. Ex. 6 at 4 ¶¶ 1, 4, ECF No. 1-6.

These provisions complied with the Union Agreement’s requirement that subsequent assignees assume ATP’s obligations to Union. These provisions explicitly limited Sojitz’s liability to its 20% interest, while ATP remained responsible for all liabilities.

Union’s interpretation would render these provisions meaningless. Under ordinary rules of contract interpretation, courts "must read all parts of the contract together and must strive to give meaning to every sentence, clause, and word to avoid rendering any portion inoperative." Ironshore Specialty Ins. Co. v. Aspen Underwriting Ltd. , 40 F. Supp. 3d 807, 815 (W.D. Tex. 2014) (quoting Balandran v. Safeco Ins. Co. of Amer. , 972 S.W.2d 738, 741 (Tex. 1998) ), aff’d , 788 F.3d 456 (5th Cir. 2015). If Sojitz agreed to assume 100% of liability, there would have been no need to include provisions limiting Sojitz’s liability to its proportionate share.¹⁵ Union’s interpretation is contrary to the explicit language of these agreements.

15 See, e.g., In re El Paso Refinery, LP , 302 F.3d 343, 352-53 (5th Cir. 2002) (finding current owner of refinery only assumed responsibility for environmental risks after foreclosure of the property it obtained because if it intended to assume all responsibility, the parties could have omitted language qualifying the assumption of liability "from and after the date of foreclosure").

Union further argued that the Participation Agreement incorporated the Union Agreement by reference and provided that in the event of any conflict between the two, the Union Agreement controls. ECF No. 22 at 13, 18. Union contended that even if the Participation Agreement intended to limit Sojitz’s responsibility to its 20% share, this is inconsistent with the Union Agreement and the Union Agreement controls.¹⁶ However, as the Court explained above, the Union Agreement did not go as far as Union contended and did not require ATP’s subsequent assignees to assume liability for all of the properties. Thus, these arguments do not help Union.¹⁷ Moreover, reading the Participation Agreement as limiting Sojitz’s liability to its 20% interest is not inconsistent with the Union Agreement. The critical point is that the Union Agreement provided that, even if ATP assigned its interest in whole or in part, it always remained liable for all of the obligations associated with the properties. Thus, ATP always remained liable for the whole even if another entity was also liable for all or part of it. The Participation Agreement complied with the Union Agreement, and Sojitz agreed to assume the obligations under the Union Agreement according to its proportionate share. The Union Agreement required no more.

16 To the extent Union argued an assignee was supposed to be liable for the full 100% even if only receiving a small share, if that is what the Union Agreement meant and the Participation Agreement violated that, the Participation Agreement would be null and void under the terms of the Union Agreement. Ex. 3 at 4 ¶ 8, ECF No. 1-3. But Union does not want the contract to be null and void—it wants to give effect to that contract to hold Sojitz liable.

17 In addition, the fact that the Participation Agreement incorporates the Union Agreement by reference alone does not help Union. See, e.g., Grimes v. Walsh & Watts, Inc. , 649 S.W.2d 724, 727 (Tex. App.—El Paso 1983, writ ref’d n.r.e.) (that Defendant’s agreement with third party grantor incorporated by reference the third party’s agreement with Plaintiff—under which the third party owed obligations to the Plaintiff—does not by itself suffice to bind Defendants to the same obligation to Plaintiff, absent other language that they expressly assumed that obligation).

c. ATP and Sojitz’s OOA.

Moreover, Sojitz and ATP’s OOA accompanying their Participation Agreement permitted the parties to withdraw and be relieved of any further liability:

15.1. Withdrawal. ... After First Production, any Party may ... withdraw from this Agreement ("Withdrawing Party")....

15.1.3. Assignment Upon Withdrawal. If the Non-withdrawing Parties agree to assume one hundred (100%) of the Withdrawing Parties’ interests, the Withdrawing Parties shall then immediately assign their interests to the Non-withdrawing Parties....

15.1.4. Payment Upon Withdrawal. Within one hundred twenty (120) days after execution of the assignment by the applicable Parties, Operator shall render a final statement to the Withdrawing Parties for their estimated shares of the costs of plugging and abandoning all wells, removing all platforms and Facilities, and clearing the site of property and equipment attributable to the assigned interest, less estimated salvage value .... Upon payment ... the Withdrawing Party shall bear no further liability for plugging and abandoning the wells, removing all platforms and Facilities, and clearing the site of property and equipment attributable to the assigned interest.

Art. 15.1, 15.1.3, 15.1.4, Ex. 5 at 61-63, ECF No. 1-5. Nothing in the Union Agreement prohibited ATP and Sojitz from agreeing to such terms.

d. ATP and Sojitz’s Purchase and Sale Agreement.

Sojitz and ATP fully performed under their Participation Agreement and OOA. In accordance with the withdrawal provisions of the OOA, Sojitz eventually assigned its interest back to ATP,¹⁸ and in exchange paid a "negative value amount" of $4,750,000.¹⁹ In exchange, ATP agreed to "assume[ ] and [to] timely perform and discharge all of [Sojitz’s] duties and obligations associated with the Properties (including any and all contractual duties and obligations...) ...." Art. 11.1, Ex. 8 at 20, ECF No. 1-8.

18 Ex. 7, ECF No. 1-7; Ex. 8 at 9, ECF No. 1-8.

19 Art. 2.2, Ex. 8 at 9, ECF No. 1-8.

The Purchase and Sale Agreement also released Sojitz from any liability for plugging and abandonment:

(a) [ATP] accepts sole responsibility for and agrees to pay all costs and expenses associated with (i) plugging, replugging and abandonment of all Wells, (ii) the proper removal, abandonment, and disposal of all Platforms, structures, pipelines, equipment and facilities associated with the Properties ..., (iii) the proper capping and burying of all flow lines associated with the Wells and located on and associated with the Properties, (iv) the proper restoration

of each Property ... as may be required by Law, and [ATP] ... irrevocably waives any and all claims they may have against [Sojitz] associated with the same; and

(b) [ATP] releases [Sojitz] from and will fully protect, defend, indemnify, and hold [Sojitz] harmless from and against any and all Claims relating to, arising out of, or connected with, directly or indirectly, the (i) plugging, replugging and abandonment of all Wells, (ii) the proper removal, abandonment, and disposal of all Platforms, structures, pipelines, equipment and facilities associated with the Properties ..., (iii) the proper capping and burying of all flow lines associated with the Wells and located on and associated with the Properties, (iv) the proper restoration of each Property, both surface and subsurface, as may be required by Law, no matter when asserted. This indemnity and defense obligation applies regardless of cause or of any negligent acts or omissions of [Sojitz]....

Art. 11.3(a) and (b), Ex. 8 at 20-21, ECF No. 1-8 (emphasis added).²⁰

20 When Sojitz assigned its interest back to ATP, the assignment documents to MMS likewise indicated that ATP agreed "to assume and be liable for all obligations pertaining to the Assigned Interest," Ex. 7 at 4 ¶ 3, 8 ¶ 3, ECF No. 1-7, including obligations to plug and abandon the properties, id . at 3 ¶ 4, 7 ¶ 4.

Finally, the Purchase and Sale Agreement superseded the Participation Agreement:

... This Agreement and the documents signed pursuant hereto supersede all prior and contemporaneous negotiations, letters of intent, understandings and agreements (whether oral or written) between the Parties or their Affiliates relating to the terms of purchase and sale of the Properties, and constitute the entire understanding and agreement between the Parties with respect to the sale, assignment and conveyance of the Properties.

Art. 15.10, Ex. 8 at 27, ECF No. 1-8 (emphasis added).

Thus, ATP and Sojitz entered into a new valid contract, which superseded their Participation Agreement and released Sojitz from any liability it assumed under the Participation Agreement in exchange for consideration. Sojitz paid for the release, including the amount Sojitz and ATP calculated as Sojitz’s share of decommissioning costs. Nothing in the Union Agreement prohibited ATP from entering into such an agreement or releasing an assignee without Union’s consent.

3. There is no contract that bars Sojitz from obtaining equitable relief.

Union contended the existing contracts bar equitable relief. ECF No. 22 at 29. The Court disagrees.

Contracts existed between Union and ATP, and between ATP and Sojitz. However, Union and Sojitz never entered into a contract as between themselves. Though the Participation Agreement defined Sojitz’s obligations toward Union, no contract governed any obligations of Union vis-à-vis Sojitz.²¹ Moreover, Sojitz already obtained partial reimbursement from ATP through the bankruptcy. Rimel Aff. ¶ 16, ECF No. 20-1. But ATP was able to reimburse only 16% of the decommissioning costs, and there is a deficiency. Under these circumstances, Sojitz has no other remedy at law and should not be barred from seeking a remedy in equity.

21 Union cited several cases arguing that the existing contracts bar Sojitz’s subrogation claim. ECF No. 22 at 29 (citing Amerisure Ins. Co. v. Navigators Ins. Co. , 611 F.3d 299, 308 (5th Cir. 2010) ; Farragut Fin. Corp. v. Capital One Auto Fin., Inc. , No. 1-7-497-CV, 2008 WL 4367822, at *3 (Tex. App.—Houston [1st Dist.] Sept. 25, 2008, no pet.) ; Fortis Benefits v. Cantu , 234 S.W.3d 642, 650 (Tex. 2007) ; Smart v. Tower Land & Inv. Co. , 597 S.W.2d 333, 337 (Tex. 1980) ). However, they are distinguishable. In Amerisure , contractual subrogation was available to the plaintiff under the express terms of a contract, which is absent here, and the court did not need to reach the issue of equitable subrogation, which Sojitz seeks in this case. 611 F.3d at 308. In both Farragut and Fortis , there was an express contract between the parties to the suit, which is absent here between Union and Sojitz. Farragut , 2008 WL 4367822, at *3 n.3 ; Fortis , 234 S.W.3d at 650. Defendant cited Smart for the proposition that subrogation only applies "when one person confers upon another a benefit that is not required by legal duty or contract," arguing that Sojitz was required under the Participation Agreement to indemnify Union. ECF No. 22 at 29 (quoting Smart , 597 S.W.3d at 337). However, that contract is no longer in force and Union is not entitled to enforce that agreement as a third-party beneficiary. See infra , Sections III.A.4.b, IV.A.2.

4. Sojitz is entitled to equitable subrogation.

The Court finds Sojitz is entitled to equitable subrogation. In 2008, the Texas Supreme Court decided Frymire Eng’g Co. ex rel. Liberty Mut. Ins. Co. v. Jomar Int’l, Ltd. , a landmark case clarifying the theory of subrogation:

The doctrine of equitable subrogation allows a party who would otherwise lack standing to step into the shoes of and pursue the claims belonging to a party with standing. Texas courts interpret this doctrine liberally. ... [E]quitable subrogation applies ‘in every instance in which one person, not acting voluntarily, has paid a debt for which another person was primarily liable and which in equity should have been paid by the latter.’

Tex. Lone Star Petroleum Corp. v. Chesapeake Operating Inc. , No. 2:14-CV-331, 2016 WL 6677939, at *9-10 (S.D. Tex. Nov. 14, 2016) (quoting Frymire Eng’g Co. ex rel. Liberty Mut. Ins. Co. v. Jomar Int’l, Ltd. , 259 S.W.3d 140, 142 (Tex. 2008) ). To show it is entitled to equitable subrogation, Plaintiff must establish: (1) it involuntarily paid a debt (2) primarily owed by another (3) in a situation that favors equitable relief. Kenyon Int’l Emergency Servs., Inc. v. Starr Indemnity & Liab. Co. , No. 1-17-386-CV, 2018 WL 6241461, at *6 (Tex. App.—Houston [1st Dist.] Nov. 29, 2018, no pet. h.) (citing Frymire , 259 S.W.3d at 142 ).

a. Sojitz involuntarily satisfied a legal obligation.

First, it is undisputed that Sojitz paid the full cost of decommissioning, and that Sojitz paid it to satisfy its obligation to the government pursuant to the government’s letter ordering it to decommission the properties. "A payment is only voluntary when the payor acts: ... without being legally obligated to pay." LGS Tech., LP v. United States Fire Ins. Co. , No. 2:07-CV-399, 2015 WL 5934689, at *6 (E.D. Tex. Aug. 14, 2015) (citing Frymire , 259 S.W.3d at 145 ), report and recommendation adopted , 2015 WL 5934690 (E.D. Tex. Oct. 12, 2015). Since Sojitz was obligated by the government to conduct decommissioning, this cannot be construed as voluntary.

b. The legal obligation was primarily owed by another.

The Court finds Plaintiff adequately satisfied the second element and showed it paid a debt for which another was primarily liable, according to the contracts in existence. The parties are free to apportion their responsibility for costs of decommissioning by contract. Total , 2018 WL 4599842, at *9 (citing Fruge , 337 F.3d at 563 nn.5, 6 ). ATP was allowed to assign part of its interest to another party without Union’s consent, which it did. Sojitz would have been contractually liable to pay for 20% of decommissioning costs. Both parties fully performed under this contract. They then entered into a second contract which superseded the first one. Sojitz paid consideration to be expressly released from any liability for decommissioning.²² Nothing prevented ATP from releasing Sojitz without Union’s consent, and it did. This was a valid contract, entered into years before ATP went bankrupt. Union cannot avoid that contract through its claims here.

22 Cf. Total , 2018 WL 4599842, at *11 (assignor remained liable for share of decommissioning costs because contract did not expressly release assignor from that obligation); LLOG Expl. Offshore LLC v. Newfield Expl. Co. , No. 15-1746, 2016 WL 98618, at *6 (E.D. La. Jan. 8, 2016) (same); GOM Shelf, LLC v. Sun Operating Ltd. P’ship , No. 4:06-CV-3444, 2008 WL 901482, at *10-11 (S.D. Tex. Mar. 31, 2008) (same); Seagull , 207 S.W.3d at 346-47 (same). Plaintiff correctly cited some of these cases for the proposition that Union cannot escape its liability for decommissioning merely by assigning its interest, absent a release. Union attempted to distinguish these cases because they involved Joint Operating Agreements between co-operators, whereas Union and Sojitz did not enter into any Joint Operating Agreement and were never co-operators. ECF No. 22 at 24-27. However, this is a strawman argument. It does not matter that those cases involved Joint Operating Agreements and here the contracts that exist are called something else. It matters that, in each of these cases, courts examined the existing contracts between the parties to determine how they allocated decommissioning costs among themselves. See, e.g., Total , 2018 WL 4599842, at *5-11; GOM Shelf , 2008 WL 901482, at *6-11 ; Seagull , 207 S.W.3d at 345-47. It is also irrelevant that those cases involved co-operators because here, Union accrued decommissioning obligations as both a record title owner and the owner of deep operating rights.

While both Union and Sojitz had an obligation to the government, because Sojitz was contractually released, only ATP, and secondarily Union, remained liable to pay for decommissioning. Union now stands in ATP’s shoes because ATP is bankrupt. Union had no one else who contractually assumed liability for decommissioning costs. Indeed, Union conceded that if Sojitz did not exist, it would be 100% liable for decommissioning in ATP’s place. ECF No. 22 at 18. A debt owed is only as good as its debtor. While Union sought to protect itself by keeping ATP fully liable, unfortunately for Union, ATP declared bankruptcy and was only able to pay a fraction of the total cost of decommissioning.²³

23 The Court notes that several entities who were predecessors-in-interest to ATP for various oil and gas fields in the OCS are in a similar position today and were involved in much litigation over apportioning decommissioning costs due to ATP’s default. See, e.g., Total , 2018 WL 4599842; In re ATP Oil & Gas Corp. , No. 12-36187, 2013 WL 3157567 (Bankr. S.D. Tex. June 19, 2013). In another such case, the court aptly recognized that "the cost that [ATP’s predecessors] may bear is a reflection of the credit risk [they] took. ... This unfortunate position is no different from that of any other creditor that relies on the promise of performance from an eventually failed entity." In re ATP Oil & Gas Corp. , 2013 WL 3157567, at *3.

Furthermore, assuming ATP had not declared bankruptcy, it would have no right to seek contribution from Sojitz. As ATP’s predecessor, Union also has no right to seek contribution from Sojitz. Union can have no greater rights against Sojitz than ATP would have.²⁴ By law, Sojitz was unable to escape its liability to the government, but it did contract around its financial liability, which it was permitted to do. Thus, when Sojitz paid for the decommissioning of these two properties, it paid a debt for which Union was primarily liable.

24 See, e.g., Mut. Life Ins. Co. of New York v. Daddy$ Money, Inc. , 646 S.W.2d 255, 259 (Tex. App.—Dallas 1982, writ ref’d n.r.e.) (where premium finance notes were released and payee of the note had no more rights against the insured, the third-party beneficiary could not enforce the notes because it had no greater rights than the payee).

Union contended Sojitz cannot be subrogated to the rights of the government because the regulations do not provide for a private cause of action. ECF No. 22 at 28-29; ECF No. 26 at 11-13. While it is true there is no private cause of action under the federal regulations,²⁵ courts have previously recognized a right to subrogation for parties co-liable to the government for decommissioning. Specifically, such parties cannot be subrogated to the police powers of MMS (now BOEM), but can be subrogated to the government’s economic rights. See In re Tri-Union Dev. Corp. , 314 B.R. 611, 622 (S.D. Tex. 2004) ; accord In re ATP Oil & Gas Corp. , 2013 WL 3157567, at *2 ("The Court has previously held that a party paying decommissioning costs may be subrogated to the economic rights of the United States.") (citing In re Tri-Union Dev. Corp. , 314 B.R. at 622 ); In re Tri-Union Dev. Corp. , No. 3-44908, 2012 WL 3821870, at *12-13 (Bankr. S.D. Tex. Sept. 3, 2012) (reaffirming that surety who paid bond for decommissioning obligations could be subrogated to BOEM’s economic rights to recover the costs, but not BOEM’s police powers) (citing In re Tri-Union Dev. Corp. , 314 B.R. at 622 ).²⁶

25 See GOM Shelf , 2008 WL 901482, at *7 (citing Fruge , 337 F.3d at 563 ).

26 Union contended these cases are not persuasive because the first In re Tri-Union case relied on the parties’ agreement that they could be subrogated to MMS’s economic rights, and that both Tri-Union cases were limited to the bankruptcy context. ECF No. 22 at 28-29; ECF No. 26 at 11-13. However, Union did not cite contrary authority. Union only relied on cases that state a violation of the regulations do not give rise to a private cause of action. ECF No. 26 at 13-14. Union also quoted GOM Shelf : "Although the Regional Director of the MMS may require the assignor to bring the lease into compliance under certain circumstances, a private individual or entity may not." ECF No. 26 at 13 (quoting GOM Shelf , 2008 WL 901482, at *7 ). This Court’s recommendation does not go so far as to create a private cause of action, and the right to subrogation in this context is limited. The prohibition on a private cause of action is not inconsistent with the possibility that parties paying for decommissioning can be subrogated to the economic rights of BOEM. Certainly, such parties cannot require another private party to perform decommissioning or "bring the lease into compliance," but this only reflects a limitation on subrogation to BOEM’s police powers. In fact, Union conceded that the Tri-Union cases are not inconsistent with its cited authorities. ECF No. 26 at 14. Thus, nothing precludes this Court from relying on the Tri-Union cases to find that the parties can be subrogated to BOEM’s economic rights. This only recognizes that—to the extent there is no express contract that bars equitable relief or allocates decommissioning responsibilities among the parties differently—a party conducting decommissioning may bring a claim against other parties to recover the costs of decommissioning.

In other words, once the government requires a party to conduct decommissioning, the party can seek reimbursement from other parties who are primarily liable for the same (subject to any contracts they entered into to apportion such costs). Accordingly, the Court finds Sojitz is subrogated to the rights of the government to seek reimbursement for its decommissioning costs.

c. Equity entitles Sojitz to recover 100% of the decommissioning costs from Union.

Finally, to be entitled to subrogation, Plaintiff must show the circumstances of the situation favor equitable relief. Kenyon Int’l Emergency Servs. , 2018 WL 6241461, at *7 (citing Frymire , 259 S.W.3d at 146 ). This determination turns on the general principles of equity. "The trial court must balance the equities in view of the totality of the circumstances to determine whether a party is entitled to equitable subrogation." NSEW Holdings LLC v. Wells Fargo Bank, N.A. , No. 4:15-CV-828, 2017 WL 1030313, at *3 (E.D. Tex. Mar. 17, 2017) (citing Bank of Am. v. Babu , 340 S.W.3d 917, 926 (Tex. App.—Dallas 2011, pet. denied) ). "[E]ach case turns on its own facts when the issue is one of purely equitable subrogation." Babu , 340 S.W.3d at 926 (quoting Murray v. Cadle Co. , 257 S.W.3d 291, 300 (Tex. App.— Dallas 2008, pet. denied) ).

Because Sojitz never assumed more than 20% liability, Sojitz is entitled to recover at least 80% and at most 100% from Union. Sojitz already paid ATP once for the estimated cost of decommissioning and was validly released. Through the bankruptcy, ATP contributed about 16% of the decommissioning costs. Rimel Aff. ¶ 16, ECF No. 20-1. In contrast, Union did not pay any of the costs, but was paid royalties throughout the production period. Ex. 3 at 2 ¶ 3, ECF No. 1-3; Ex. 4 at 4 ¶¶ 4(c), (d), ECF No. 1-4. The balance of the equities dictates that Sojitz should not be required to pay the cost of decommissioning twice. Therefore, Union should be held liable for the remaining decommissioning costs which ATP was unable to pay.²⁷

27 Union argued that Sojitz consistently offered to pay for 20% of the costs after they were both called upon by the government to perform decommissioning. ECF No. 22 at 10, 16. However, the Court construes these offers as part of settlement negotiations. See, e.g. , Fed. R. Evid. 408 (Evidence of settlement negotiations may not be used "to prove or disprove the validity or amount of a disputed claim or to impeach by a prior inconsistent statement or contradiction."). In addition, to the extent Union argued the consideration that Sojitz paid ATP was inadequate, ECF No. 22 at 14, nothing prevented ATP and Sojitz from entering into that contract, and Union never objected.

It is equitable for Union to bear 100% of the remaining cost. Union was always liable as a record title owner and owner of deep operating rights. As owner of the ORRI, Union received the benefit of its bargain by retaining those rights and retaining a paying interest at all times. Union also received the benefit of its bargain when it agreed to have Sojitz be the operator for the decommissioning of the wells, and for Sojitz to do it at a third of the cost, which significantly reduced Union’s ultimate liability.

B. Contribution, Quantum Meruit, And Unjust Enrichment.

Both parties moved for summary judgment on Plaintiff’s claims for contribution, quantum meruit, and unjust enrichment, which Plaintiff brought as alternative theories of recovery. ECF No. 20 at 6-7, 17. However, since the Court recommends Plaintiff be awarded relief under the theory of subrogation, the Court need not address Plaintiff’s alternative theories of recovery.²⁸

28 The Court notes that it deems subrogation to be a more appropriate theory of recovery than contribution because, even though both Sojitz and Union were jointly and severally liable to the government, under the existing contracts, Sojitz was validly released from any contractual liability for decommissioning. Thus, Sojitz paid a debt for which another was primarily liable, which goes beyond discharging what could otherwise be characterized as a joint and several obligation.

The Court notes that Union asserted an affirmative defense to Plaintiff’s claims for unjust enrichment and quantum meruit, alleging that the existence of Plaintiff’s contracts with ATP bars those claims. ECF No. 22 at 8-9. To the extent Union argued that the existence of any contract—Sojitz’s contracts with ATP—bars all equitable relief, Union did not cite any case that stands for that proposition and thus did not meet its summary judgment burden. Union’s cases do not go that far.²⁹ While the existence of an express contract between the parties ordinarily precludes unjust enrichment and quantum meruit claims,³⁰ Union’s cited cases are distinguishable because Union and Sojitz had no contract with each other.³¹ Defendant did not meet its summary judgment burden on Plaintiff’s alternate claims.

29 Union also argued that Plaintiff’s claim for contribution is barred because Texas courts only allow contribution among co-tortfeasors who are jointly liable for the same injury and for guaranty and surety agreements. ECF No. 22 at 30 (citing In re Velocita Worldwide Logistics, Inc. , 608 F.3d 212, 214 (5th Cir. 2010) ; Beech Aircraft Corp. v. Jinkins , 739 S.W.3d 19, 21 (Tex. 1987) ). These cases do not go that far. Both courts were confronted with the narrow issue of whether to extend the right to contribution to co-defendant parties to a settlement agreement, an issue not relevant here. In re Velocita , 608 F.3d at 214 ; Beech Aircraft Corp. , 739 S.W.3d at 19. Notably, the Fifth Circuit reached its decision by analyzing the policy reasons behind contribution. It explained that contribution makes sense in the surety and guaranty context because "the subject matter of the contract is (generally) money" and "the only contested item is completely fungible and thus easily divisible, making pro rata liability simple to calculate." In re Velocita , 608 F.3d at 215. "Disallowing contribution would force each guarantor in a multi-party guaranty to gamble with his potential liability. This would stifle the lending that guaranties encourage." Id. Because the plaintiff sought contribution pursuant to a settlement agreement involving injunctive relief that was individually tailored to various defendants, that specific factual context was not conductive to allowing recovery under contribution. Id. at 215-16. Conversely, similar reasoning would support applying—not prohibiting—contribution in this context. The only contested item here is money. See id. at 215. Moreover, prohibiting contribution in this context could create perverse incentives and dissuade other parties in the future with oil and gas interests from complying with government orders to decommission such properties out of fear they would have to bear the full cost alone. Id. Union did not meet its summary judgment burden regarding Plaintiff’s contribution claim.

30 See Hill v. Shamoun & Norman, LLP , 544 S.W.3d 724, 737 (Tex. 2018) (citing In re Kellogg Brown & Root, Inc. , 166 S.W.3d 732, 740 (Tex. 2005) ); Power v. GSE Consulting LP , No. 2-16-175-CV, 2017 WL 2686324, at *3 (Tex. App.—Fort Worth June 22, 2017, no pet.) (citing Fortune Prod. Co. v. Conoco, Inc. , 52 S.W.3d 671, 683-84 (Tex. 2000) ).

31 Defendant relied on Fortune Prod. Co. and Pepi Corp. v. Galliford . In Fortune Prod. Co. , an express contract between several of the plaintiffs and the defendant precluded plaintiff’s recovery for unjust enrichment. 52 S.W.3d at 684-85. In contrast, there is no contract between Union and Sojitz. In Pepi Corp. , where the plaintiff subcontractor had an express contract with a third party— the defendant’s contractor—the plaintiff could not sue the defendant directly under a quantum meruit theory after the third party failed to pay. 254 S.W.3d 457, 463 (Tex. App.—Houston [1st Dist] 2007, pet. denied). First, Pepi Corp. has limited application to quantum meruit alone. Moreover, it is distinguishable. The court reached its holding because Galliford had an express contract under which he could have sought relief, and he sought to circumvent that contract. Id. at 463. Here, Plaintiff obtained some reimbursement from ATP through the bankruptcy. Rimel Aff. ¶ 16, ECF No. 20-1. But ATP was only able to pay a fraction of the decommissioning costs and there is a deficiency. Union did not establish that the existence of any contract bars equitable relief under these unique facts. Moreover, this argument is moot since the Court already decided Plaintiff is entitled to subrogation and need not decide these alternative claims.

IV.

SOJITZ MOVED FOR SUMMARY JUDGMENT ON UNION’S COUNTERCLAIMS AND AFFIRMATIVE DEFENSES

A. Declaratory Judgment And Breach Of Contract.

Sojitz moved for summary judgment on Union’s claims for declaratory judgment and breach of contract. ECF No. 20 at 6-7, 22-26. In Union’s Second Amended Answer and Counterclaims, Union asserted a breach of contract claim under the theory that it was a third-party beneficiary to the Participation Agreement. ECF No. 18. The Court finds that Sojitz satisfied its summary judgment burden on this counterclaim, and Union failed to create a genuine dispute of material fact.

1. Union was a third-party beneficiary to the Participation Agreement.

Generally, "the benefits and burdens of a contract belong solely to the contracting parties, and ‘no person can sue upon a contract except he being a party to it or in privity with it.’ " First Bank v. Brumitt , 519 S.W.3d 95, 102 (Tex. 2017) (quoting House v. Hous. Waterworks Co. , 31 S.W. 179, 179 (Tex. 1895) ). "An exception to this general rule permits a person who is not a party to the contract to sue for damages caused by its breach if the person qualifies as a third-party beneficiary." Id .

"[A] person seeking to establish third-party beneficiary status must demonstrate that the contracting parties ‘intended to secure a benefit to that third party’ and ‘entered into the contract directly for the third party’s benefit.’ " Id. (quoting Stine v. Stewart , 80 S.W.3d 586, 589 (Tex. 2002) ). "[T]he contracting parties must have intended to grant the third party the right to be a ‘claimant’ in the event of a breach." Id. (quoting Corpus Christi Bank & Tr. v. Smith , 525 S.W.2d 501, 505 (Tex. 1975) ).

"To determine whether the contracting parties intended to directly benefit a third party and entered into the contract for that purpose, courts must look solely to the contract’s language, construed as a whole." Id. (citing Southland Royalty Co. v. Pan Am. Petroleum Corp. , 378 S.W.2d 50, 53 (Tex. 1964) ; Citizens Nat’l Bank in Abilene v. Tex. & P. Ry. Co. , 150 S.W.2d 1003, 1006 (Tex. 1941) ). "The contract must include ‘a clear and unequivocal expression of the contracting parties’ intent to directly benefit a third party,’ and any implied intent to create a third-party beneficiary is insufficient." Id. at 103. (citing Tawes v. Barnes , 340 S.W.3d 419, 425 (Tex. 2011) ).

"A third-party beneficiary does not have to show that the signatories executed the contract solely to benefit the non-contracting party, but rather, the focus is on whether the contracting parties intended, at least in part, to discharge an obligation owed to a third party." In re Tex. Rangers Baseball Partners , 498 B.R. 679, 702 (Bankr. N.D. Tex. 2013). In an unambiguous contract, "[t]he parties’ intent to create a third-party beneficiary is thus simply a contract term like any other of the contract’s terms" for the court’s interpretation. First Bank , 519 S.W.3d at 106.

Language in the Participation Agreement indicates the parties intended to benefit Union as a third-party beneficiary, and indeed they entered into that contract which directly benefited Union.³² The Participation Agreement was subject to the Union Agreement and entitled Union to an ORRI. Ex. 4 at 4 ¶¶ 4, 4(c), 4(d), ECF No. 1-4. In the Participation Agreement, ATP agreed to assume all liabilities created from the operations on the properties and Sojitz agreed to assume those liabilities with respect to its interest share. Ex. 4 at 4 ¶ 4(e), 5 ¶ 6, 13 ¶¶ 1, 4, ECF No. 1-4; see, e.g., In re Tex. Rangers Baseball Partners , 498 B.R. at 702-03 ("[A]n agreement ‘contain[s] the requisite clear and unequivocal language of intent to directly benefit a third party’ when, for example, it provides for the payment ‘of a specific amount of money’ to an identified recipient.") (citation omitted). Thus, Union was a third-party beneficiary to the Participation Agreement.

32 The OOA contains language suggesting ATP and Sojitz intended to preclude intended third-party beneficiaries. Art. 26.2, Ex. 5 at 76, ECF No. 1-5; see, e.g., MCI Telecomm. Corp. v. Tex. Util. Elec. Co. , 995 S.W.2d 647, 651-52 (Tex. 1999) (finding no third-party beneficiary because the contracting parties’ agreement explicitly indicated they intended not to benefit any nonsignatory); accord Fomento de Construcciones y Contratas, S.A. v. VeroLube, Inc. , No. 4:14-CV-2199, 2015 WL 1235738, at *2 (S.D. Tex. Mar. 13, 2015) (same) (granting motion to dismiss) (citing id. ) However, this language was only included in the OOA, not the Participation Agreement. Moreover, the same provision subjected the terms of the OOA to the Union and Participation Agreements. Art. 26.2, Ex. 5 at 76, ECF No. 1-5; see, e.g., Excel Willowbrook, L.L.C. v. JP Morgan Chase Bank, Nat’l Ass’n , 758 F.3d 592, 598-99 (5th Cir. 2014) (the no-beneficiaries clause was not dispositive because it was qualified by the modifying phrase ‘except as otherwise specifically provided in this agreement,’ and Chase Bank’s promise to assume Washington Mutual’s obligations is tantamount to creating a third-party beneficiary). Thus, principles of contract interpretation indicate that ATP and Sojitz disavowed any third-party beneficiary, other than Union. See La Joya Indep. Sch. Dist. v. Villarreal , No. 13-13-325-CV, 2014 WL 3050484, at *7 (Tex. App.—Corpus Christi July 3, 2014, pet. denied) (court construed contract containing both a no-beneficiaries clause and a clause providing commissions to appellee as excluding all third-party beneficiaries except appellee).

2. Union lost its ability to enforce the Participation Agreement when ATP and Sojitz entered into the Purchase and Sale Agreement.

a. Contracting parties retain the right to modify their agreement, even to the detriment of a third-party beneficiary.

Even if Union was a third-party beneficiary, however, its right to enforce the agreement terminated when the Participation Agreement was superseded by the Purchase and Sale Agreement. Sojitz and ATP were permitted to rescind or modify the Participation Agreement without Union’s consent, and they did.

"Contracting parties retain the power to modify their agreement, including as well, a benefit created in favor of a third party." Rowan Co. Inc. v. Acadian Ambul. Serv., Inc. , No. H-05-3400, 2008 WL 1989791, at *4 (S.D. Tex. May 2, 2008) (citing Restatement (Second) of Contracts § 311(2) (1981) ).³³ "The rule is well-settled that a third-party beneficiary contract may be rescinded or modified by the original parties prior to acceptance by the third party." Hynds v. Foster , No. 1-15-1034-CV, 2017 WL 769909, at *10 (Tex. App.—Houston [1st Dist.] Feb. 28, 2017, no pet.) (quoting San Pedro State Bank v. Engle , 643 S.W.2d 450, 452 (Tex. App.—San Antonio 1982, no writ) ).

33 See Restatement (Second) of Contracts § 311 (1981) ("(1) Discharge or modification of a duty to an intended beneficiary by conduct of the promisee or by a subsequent agreement between promisor and promisee is ineffective if a term of the promise creating the duty so provides. (2) In the absence of such a term, the promisor and promisee retain power to discharge or modify the duty by subsequent agreement. (3) Such power terminates when the beneficiary, before he receives notification of the discharge or modification , materially changes his position in justifiable reliance on the promise or brings suit on it or manifests assent to it at the request of the promisor or promisee....") (emphasis added).

Though the right of the creditor beneficiary arises immediately on the formation of the contract, his right, unlike that of a donee beneficiary, is not immediately indefeasible.... [U]ntil the creditor

brings suit, or otherwise materially changes his position in reliance on the promise, he may lose his right or have it qualified by a new agreement between the promisor and the promisee.

Excel Willowbrook , 758 F.3d at 598 n.10 (quoting Restatement (First) of Contracts § 136 (1932) ). "[I]n the absence of such an agreement [between promisor and promisee not to vary a duty to a beneficiary without his consent] the parties retain control over the contractual relation they created." Id. (quoting Restatement (Second) of Contracts § 311 cmt. f (1981) ).

"[T]he power to modify terminates the moment the beneficiary (1) materially changes position in justifiable reliance on the agreement, (2) brings suit pursuant to the agreement, or (3) otherwise manifests assent to the agreement." Rowan , 2008 WL 1989791, at *4 (citing Restatement (Second) of Contracts § 311(3) ) (contracting parties properly modified their agreement and third-party beneficiary had no right to enforce initial agreement because there was no evidence in the record that the third-party beneficiary relied to its detriment on the agreement or that it had any independent knowledge it benefited from the original agreement). Sojitz adequately demonstrated that, even if Union were a third-party beneficiary, there is no evidence Union satisfied any of these forms of conduct required to terminate ATP’s and Sojitz’s power to modify their agreement. ECF No. 25 at 15-17.

b. Union failed to create a genuine dispute of material fact as to whether it materially changed its position in justifiable reliance on, or assented to, the Participation Agreement.

Union did not present any competent summary judgment evidence that it materially changed its position in justifiable reliance on the Participation Agreement, brought suit pursuant to that agreement, or otherwise manifested assent to that agreement before ATP and Sojitz entered into the Purchase and Sale Agreement. Union only took action to enforce the Participation Agreement after it had already been superseded by a new agreement. Therefore, Sojitz and ATP did not require Union’s consent to enter into a new agreement that superseded the Participation Agreement. Because ATP could no longer enforce the Participation Agreement against Sojitz, neither could Union as a third-party beneficiary.³⁴

34 See, supra n.24.

The only evidence Union presented is that (1) the Union Agreement required future assignees to assume the liabilities ATP assumed under that contract, and (2) BOEM’s publicly available serial register pages. Ex. 3 at 4 ¶ 8, ECF No. 1-3; Ex. F, ECF No. 22-6. Union’s evidence does not equate to proof that Union had actual knowledge that ATP assigned any part of its interest to Sojitz and that the Participation Agreement complied with the Union Agreement.

BOEM’s serial register pages indicate only that a 20% operating rights interest was assigned to Sojitz, and then reassigned to ATP. Ex. F, ECF No. 22-6. The evidence does not include any information regarding the contract terms. These pages may have given Union constructive notice of the assignments. However, Union presented no competent summary judgment evidence by way of affidavit or otherwise (1) that any of its representatives looked at the serial register pages or otherwise gained actual knowledge of the assignments; (2) that it saw or reviewed the Participation Agreement; (3) that it otherwise became aware of the terms of the Participation Agreement; or (4) that it became aware that the Participation Agreement complied with the Union Agreement to give it third party beneficiary status, before Sojitz and ATP entered into the Purchase and Sale Agreement.

Union also argued that it assented to or relied on the Participation Agreement as a third-party beneficiary because Sojitz was required to pay the ORRI to Union. ECF No. 26 at 22. However, Union did not provide any evidence that Sojitz ever made ORRI payments to Union directly. To the contrary, the evidence suggests that ATP continued making all royalty payments to Union, including Sojitz’s share. Sojitz designated ATP as the operator of each property,³⁵ and the OOA required the operator (ATP) to make all royalty payments on behalf of all signatories to the OOA.³⁶ The OOA prescribed that the non-operator’s (Sojitz) share of royalty payments would be deducted from its share of profits.³⁷ While neither party produced evidence of who actually made the royalty payments to Union, Union’s argument that Sojitz owed it royalty payments does not equate to an inference that Union had actual knowledge of Sojitz’s interest, the Participation Agreement, and Union’s status as a third party beneficiary to the Participation Agreement.

35 Ex. 4 at 6 ¶ 7, ECF No. 1-4; Ex. 5 at 82 § III, ECF No. 1-5; Ex. F at 2-3, ECF No. 22-6.

36 "16.3. Payment of Rentals and Minimum Royalties. Operator shall pay in a timely manner, for the joint account of the Parties, all rental, minimum royalties, and other similar payments accruing under the Lease and shall, on request, submit evidence of each such payment to the Parties." Art. 16.3, Ex. 5 at 65, ECF No. 1-5.

37 "16.5.2. Payment of Net Proceed to Non-operator. The Operator shall pay the Non-operator within thirty (30) days after receipt of production revenues by the Operator the net proceeds attributable to Non-operator’s share of production from the Lease after deducting Non-operator’s proportionate share of any royalty payment, any currently existing overriding royalty obligation owed by a Non-operator...." Art. 16.5.2, Ex. 5 at 66, ECF No. 1-5.

At most, Union presented evidence that it did nothing to object to the Participation Agreement. But this is not tantamount to assent if Union has not established that it had actual knowledge of its third-party beneficiary status in the first place. To the extent inaction can constitute competent summary judgment evidence of assent, Union did not cite any case law that this element can be satisfied by passive, rather than affirmative, conduct. To the contrary, the cases Defendant cited involved factual circumstances where the third-party beneficiaries took affirmative action demonstrating assent to, or reliance on, the agreements they sought to enforce.³⁸ Thus, Defendant’s cases are factually distinguishable.

38 See, e.g., In re Tex. Rangers Baseball Partners , 498 B.R. at 702-03 (contracting parties could not modify agreement without consent of third party beneficiary where beneficiary had participated in the revision of the initial agreement, signed a consent form to the initial agreement, and relied on the initial agreement and accepted its benefits by accepting payments from one of the contracting parties pursuant to the contract); Houston Lighting & Power Co. v. Wheelabrator Coal Servs. Co. , 788 S.W.2d 933, 937 (Tex. App.—Houston [14th Dist.] 1990, no writ) (contracting parties could not rescind initial agreement without consent of third party beneficiary, where third party beneficiary and one of the contracting parties were co-affiliates of the same parent company, an employee of the third party beneficiary was responsible for negotiating the agreement on behalf of all co-affiliates of the parent company, and that employee represented both the contracting party and third party beneficiary while negotiating the agreement); San Pedro State Bank , 643 S.W.2d at 451-53 (contracting parties could not modify agreement without consent of third party beneficiaries where beneficiaries already deposited money into the escrow account in reliance on the original escrow agreement).

At least one case rejected the notion that mere awareness of such agreement suffices to show the third-party beneficiary assented to or justifiably relied on the agreement. See Rowan , 2008 WL 1989791, at *4 (third party beneficiary had no right to enforce initial agreement where—before the agreement was modified—the beneficiary was only aware that an agreement had been reached, and there was no evidence that it relied to its detriment on the agreement or that it had any independent knowledge it benefited from that agreement).³⁹

39 Union contended Rowan is distinguishable because it (Union) was aware the Union Agreement required ATP’s future assignees to indemnify Union, public records indicated Sojitz’s interest, and Union was entitled to the ORRI. ECF No. 26 at 22. But Union must support these assertions with evidence. Conclusory assertions and attorney argument are insufficient to defeat summary judgment. Velasco v. Cameron Cty. , 721 F. App’x 387, 388-89 (5th Cir. 2018) ; Blue Spike, LLC v. Audible Magic Corp. , No. 6:15-CV-584, 2016 WL 3653516, at *4 (E.D. Tex. May 31, 2016).

Absent evidence of Union’s actual knowledge of the terms of the Participation Agreement, the Court must make too many assumptions and unsupported inferences to find Union created a material dispute of fact to defeat summary judgment.⁴⁰ Accordingly, ATP and Sojitz did not need Union’s consent to modify the Participation Agreement and enter into a new agreement. Sojitz was validly released, and Union cannot enforce the Participation Agreement against Sojitz.

40 Even if Sojitz and ATP required Union’s consent to enter into the Purchase and Sale Agreement, Union’s arguments only go so far. Since the Participation Agreement only required Sojitz to assume ATP’s obligations to Union for its proportionate share, Union still would be liable for at least 80% of the decommissioning costs. See, e.g., In re El Paso Refinery , 302 F.3d at 353-54.

Sojitz met its burden to show that Union cannot establish the elements of its counterclaim for breach of contract. Therefore, Plaintiff is entitled to summary judgment on Union’s counterclaim for breach of contract. Sojitz is likewise entitled to summary judgment on Union’s counterclaim for declaratory judgment.

B. Covenant Running With The Land.

Sojitz moved for summary judgment on Union’s affirmative defense that the indemnity obligation is a covenant running with the land. ECF No. 20 at 26-27.

1. The indemnity obligation does not touch and concern the land.

"In Texas, a covenant runs with the land and binds subsequent owners when: (1) it touches and concerns the land; (2) relates to a thing in existence, or specifically binds the parties and their assigns; (3) is intended by the original parties to run with the land; and (4) when the successor to the burden has notice." Int’l Interests, LP v. Mt. Hawley Ins. Co. , No. H-11-580, 2012 WL 3776483, at *4 (S.D. Tex. Aug. 29, 2012) (citing Inwood N. Homeowners’ Ass’n, Inc. v. Harris , 736 S.W.2d 632, 635 (Tex. 1987) ).

Plaintiff established that Union cannot meet at least one element of this claim: whether the indemnity obligation touches and concerns the land. "A covenant will ‘touch and concern’ the land if it affects the ‘nature, quality or value of the thing demised, independently of collateral circumstances, or if it affect[s] the mode of enjoying it.’ " Id. (quoting In re El Paso Refinery , 302 F.3d at 356 ). "Texas cases generally look to whether an agreement benefits or burdens the property." Id . (citing In re El Paso Refinery , 302 F.3d at 356 ). "A chief consideration of a covenant ‘touching and concerning the land’ is whether it is so related to the land as to enhance its value and confer benefit upon it." Id. (quoting Homsey v. Univ. Gardens Racquet Club , 730 S.W.2d 763, 764 (Tex. App.—El Paso 1987, writ ref’d n.r.e.) ).

In Re El Paso Refinery Plaintiff cited is controlling. This case involved an attempt to allocate contractual liability for environmental contamination among past and present owners of an oil refinery. 302 F.3d at 346. El Paso Refinery, L.P. ("Debtor") purchased an oil refinery from TRMI Holdings, Inc. ("TRMI"). Id. at 346. The Debtor’s purchase documents included covenants preventing any subsequent owner from seeking contribution from TRMI, or from compelling TRMI to take any remedial action, regarding environmental contamination at the refinery. Id. at 346. When Debtor filed for bankruptcy, certain lenders foreclosed on and acquired the refinery, which they conveyed to a holding company created for this purpose, Refinery Holding Company, L.P. ("RHC"). Id. at 346-47. RHC sought contribution for environmental claims from TRMI. Id. at 347. TRMI contended its original sale agreement and deed to the Debtor included a covenant running with the land preventing such action by future owners. Id. at 347, 354-55. The court found that the obligation to TRMI in the original sale documents were personal covenants affecting only TRMI and did not constitute covenants running with the land.⁴¹

41 "Any burden or benefit created by the TRMI Deed affects only TRMI personally and has no direct impact upon the land itself. The Refinery’s owner may, in accordance with the deed’s provisions, take remedial action or not take remedial action, pollute or not pollute, as long as contribution is not sought from TRMI. The covenant does not compel nor preclude the promisor or any subsequent owner from doing anything on the land itself. The covenant is not predicated upon an agreement to refrain from taking any action on the land, as in the case of a negative covenant. ... Nor does it permit TRMI, the promisee, to enter or utilize the land for any purpose. ... Rather, it is a continuing and non-contingent contractual agreement under which the Debtor agrees to refrain from seeking environmental remediation or damages from TRMI. A personal contractual agreement does not qualify as a covenant. ... [T]he covenant operates as a cost-shifting mechanism.... We believe such a provision is more analogous to an obligation to assume an encumbrance ... to pay for all environmental clean-up costs. Under Texas law, a covenant to pay an encumbrance does not run with the land." In re El Paso Refinery , 302 F.3d at 356-57 (internal citations omitted).

Like the deed in In re El Paso Refinery , the Union Agreement required ATP and subsequent assignees to assume decommissioning costs and indemnify Union for any liabilities—essentially the same right TRMI included in the deed—and "operate[d] as a cost-shifting mechanism." Id. at 357. Likewise, it is personal to Union and only conferred a benefit onto Union.⁴² It is not predicated on future assignees either taking or refraining from taking any particular action on the land, nor does it affect the value of the land. Id. at 356-57. The Court finds that ATP’s obligation to assume 100% of all liabilities is a personal covenant, not a covenant running with the land. 2. Union’s counterarguments and authorities are unpersuasive.

42 "A personal covenant ... does not touch and concern the land, because such a covenant affects the grantor personally and is unrelated to the use of the land." Id. at 356; see also, e.g., Int’l Interests , 2012 WL 3776483, at *4 (covenant to insure the property for the benefit of the mortgagee does not touch and concern the land because it neither benefits nor burdens the property, and only secures a benefit to the mortgagee).

Union attempted to distinguish In re El Paso Refinery , arguing that decommissioning "touches and concerns the land because it requires the liable party to physically cap wells and remove any infrastructure." ECF No. 22 at 27 n.5. This distinction is superficial. Any environmental remediation contemplated by TRMI’s deed is sufficiently similar to decommissioning and would likewise involve some form of clean-up. The key point of comparison is that, in both, subsequent assignees could not require the assignor (Union or TRMI) to pay for, or assist in such environmental clean-up and/or decommissioning.

Union relied on Westland Oil Dev. Corp. v. Gulf Oil Corp. , 637 S.W.2d 903 (Tex. 1982) for the proposition that provisions in an oil-and-gas contract may create a real covenant. Id. The court in In re El Paso Refinery distinguished Westland Oil "because the party’s obligations under the covenant were triggered by an action affecting the land itself. In that case, the covenant obligating the third-party to assign part of its interest in the oil and gas leases was predicated on the drilling of a test well on the land." 302 F.3d at 357. Westland Oil is distinguishable for the same reasons here. Significantly, the court in Westland Oil found the covenant in question "affected the nature and value of the estate" and "could be considered to have rendered it less valuable." 637 S.W.2d at 911. This case does not involve any obligation that affects the land directly in a manner comparable to drilling a test well, nor any indication that the obligation to decommission the properties makes them less valuable.

Sojitz met its burden to show that Union cannot meet at least one element of its affirmative defense, and Union failed to create a genuine dispute of material fact.⁴³ Therefore, Sojitz is entitled to summary judgment on this defense.

43 Union addressed this claim only by a single footnote. ECF No. 22 at 27 n.5.

V.

CONCLUSION

The Court recommends the following:

• Sojitz’s motion for summary judgment, ECF No. 20, should be GRANTED . Judgment should be entered in favor of Sojitz in the amount of $8,403,909.38.

• Union’s motion for summary judgment, ECF Nos. 21-22, should be DENIED . Union’s counterclaims and affirmative defenses should be dismissed with prejudice.

The Parties have fourteen days from service of this Report and Recommendation to file written objections. 28 U.S.C. § 636(b)(1)(C) ; FED. R. CIV. P. 72(b). Failure to file timely objections will preclude review of factual findings or legal conclusions, except for plain error. Quinn v. Guerrero , 863 F.3d 353, 358 (5th Cir. 2017).

Signed at Houston, Texas, on January 17, 2019.