Fort Worth Court Reverses JOA Breach Finding: Operator's Failure to Invoice Precludes Recovery for Statutory Lien Expenses
The Fort Worth Court of Appeals reversed a trial court's finding that CL III breached a joint operating agreement by acquiring and foreclosing a statutory construction lien on co-owned pipeline property, holding the JOA's plain language imposed no duty to proactively pay unbilled expenses. The Texas Supreme Court had previously distinguished between the co-owners' shared liability to the lienholder for construction debt and CL III's separate contractual obligations under the JOA's expense-sharing provisions, remanding for analysis of whether the JOA required payment without operator billing.
Background and Business Context
This dispute arose from a co-ownership arrangement involving pipeline and related oil and gas interests governed by a joint operating agreement (JOA) executed in September 2015. CL III Funding Holding Company and Strategic Energy Income Fund III, LP each held 50% working interests in the Property, with Steelhead Midstream Partners, LLC serving as operator. The Property was subject to a preexisting statutory lien held by Orr Construction, Inc. for unpaid pipeline construction costs dating to 2011, when the parties' predecessors in interest had developed the Property. Strategic took the position that CL III bore sole responsibility for the lien debt, claiming CL III's predecessor WBH Energy had failed to pay Orr and that CL III had agreed to assume this liability in a prior bankruptcy settlement.
The Dual-Track Litigation
In early 2016, CL III settled with Orr, acquired the statutory lien by assignment, and filed suit in Montague County to foreclose on the Property—the very Property it co-owned with Strategic. Strategic and Steelhead responded by filing a concurrent lawsuit in Tarrant County, alleging CL III violated the JOA by failing to pay the lien debt and by pursuing foreclosure. CL III obtained a foreclosure judgment in December 2019, which Eagleridge Energy II, LLC (the subsequent purchaser of both parties' Property interests) ultimately paid. The critical procedural issue reached the Texas Supreme Court, which held that the Tarrant County action was not a collateral attack on the foreclosure judgment because it sought to establish "separate contractual debt" under the JOA rather than challenge the foreclosure result itself.
The Court's JOA Analysis
On remand, the Fort Worth Court of Appeals focused on the dispositive question: whether the JOA's expense-sharing provisions either required CL III to proactively calculate and pay its share of the lien debt without receiving an invoice from Steelhead, or prohibited CL III from acquiring and enforcing the preexisting third-party lien. The court emphasized the JOA's "recurring theme" regarding detailed billing procedures, noting that the agreement incorporated modified COPAS accounting procedures and specified that owners "shall be liable only for its Participating Interest of the costs" as "determined by Operator." The JOA required the operator to "invoice each System Owner on a periodic basis" and mandated that owners pay "within thirty (30) Days of the receipt of such invoice."
Critically, the Strategic Entities' own witnesses acknowledged at trial that Steelhead had never billed CL III for the lien as a JOA expense. As the court noted, Steelhead's corporate representative confirmed she could not recall "ever sending CL III an invoice requesting payment under the JOA." The court found this admission fatal to the breach of contract claim, holding that
the plain language of the JOA contained no such requirement or prohibitionthat would obligate CL III to pay unbilled expenses or refrain from enforcing a validly assigned statutory lien.
Implications for Joint Operating Agreements
This decision reinforces fundamental principles governing JOA expense allocation and operator billing obligations. The court's strict adherence to the JOA's plain language—particularly its detailed COPAS-based billing procedures—demonstrates that co-owners cannot be held liable for their proportionate share of expenses absent proper invoicing by the operator, even where the underlying debt may be legitimate. For midstream operators and working interest owners, the case underscores the importance of following contractual billing procedures precisely, as failure to invoice may preclude recovery regardless of equitable arguments about expense responsibility. The decision also clarifies that acquiring and enforcing a preexisting statutory lien on co-owned property does not inherently breach a JOA's expense-sharing provisions, absent specific contractual language prohibiting such actions. Practitioners drafting or negotiating JOAs should consider whether to include express provisions addressing preexisting liens and whether to impose affirmative disclosure or payment obligations that operate independently of the operator's billing cycle.