$500 MILLION JUDGMENT REVERSED—NO PARTNERSHIP WHEN CONDITIONS NOT SATISFIED OR WAIVED

Enterprise Products Partners, L.P. v. Energy Transfer Partners, L.P.
Dallas Court of Appeals (July 18, 2017)
Justices Myers (Opinion here), Stoddart, and Whitehill
ETP convinced a jury it had formed a partnership with Enterprise to develop a pipeline to transport oil from Cushing, Oklahoma to Houston, and that Enterprise had breached its duty of loyalty by contracting with another company on a similar pipeline project. The trial court entered judgment awarding ETP over $500 million in damages, interest, and disgorgement. The Dallas Court of Appeals held no partnership was formed because conditions stated in the parties’ agreement had not been satisfied or waived. So it reversed and rendered a take-nothing judgment.

The parties are builders and operators of oil and gas pipelines. In 2011, they agreed to work together to assess the viability of a proposed “Double E Pipeline” from Cushing, Oklahoma to Houston. They also agreed that if the project were found to be feasible, they would form and jointly own a limited liability company to construct and operate the pipeline. In a series of written agreements, the parties identified the steps to move toward that goal, but expressly agreed “no binding or enforceable obligations shall exist between the Parties with respect to the Transaction unless and until the Parties have received their respective board approvals and definitive agreements memorializing the terms and conditions of the Transaction have been negotiated, executed and delivered by both of the Parties.” The parties’ engineering and marketing executives worked together for several months to design and market the proposed pipeline. Ultimately, Enterprise terminated its participation on the Double E project. The next day, Enterprise reached an agreement with another company, Enbridge, to work together on a different pipeline project, which subsequently began operations.

ETP sued Enterprise for breaching its fiduciary duty as a partner by usurping a business opportunity belonging to the alleged partnership. According to ETP, a partnership had been formed pursuant to section 152.051(b) of the Texas Business Organizations Code, which provides “an association of two or more persons to carry on a business for profit as owners creates a partnership, regardless of whether . . . the persons intend to create a partnership . . . .” After a four-week trial, the jury found a partnership had been created and Enterprise failed to prove it had complied with its duty of loyalty. The resulting damages to ETP, the jury found, were $319,375,000; the trial court awarded that amount, plus interest, and an additional $150 million in disgorgement.

On appeal, the Court framed the question as whether the parties’ written agreements “created conditions precedent to the formation of a partnership, which, being unmet, prevented the parties from forming the alleged partnership through their conduct.” ETP acknowledged the conditions had not been met, but argued that formation of a partnership is governed by a five-factor test set forth in section 152.052 of the Business Organizations Code. According to ETP, the jury considered the unsatisfied conditions and other evidence in weighing the statutory factors and properly determined a partnership had been formed. The Court rejected this argument, holding that the factors listed in the statute are neither exclusive nor complete. Here, the law of conditions precedent was determinative and precluded formation of a partnership.

Conditions can, however, be waived. But ETP had not pleaded waiver of the conditions or requested a jury finding on that issue. As a consequence, it could preserve its judgment on appeal only if the evidence conclusively established waiver, which the Court held was not the case. The Court therefore reversed the judgment and rendered a take-nothing judgment for Enterprise.

Stay tuned; this is probably not the last we will hear of this case.

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