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Marubeni Spar One, LLC v. Williams Field Services - Gulf Coast Company, L.P.

Court of Chancery of Delaware

January 7, 2020


          Submitted: October 18, 2019

          Brian E. Farnan and Michael J. Farnan, of Farnan LLP, Wilmington, Delaware; OF COUNSEL: Thomas J. Heiden, Mary Rose Alexander, and Thomas A. Benhamou, of Latham & Watkins LLP, Chicago, Illinois, Attorneys for Plaintiff Marubeni Spar One, LLC.

          Adam V. Orlacchio, of Blank Rome LLP, Wilmington, Delaware; OF COUNSEL: Barry Abrams, Joshua A. Huber, and Stephanie Holden, of Blank Rome LLP, Houston, Texas, Attorneys for Defendant Williams Field Services - Gulf Coast Company, L.P.


          GLASSCOCK, Vice Chancellor

         Sports-fishermen on the U.S. East and Gulf coasts are well acquainted with the "canyons," the drowned mouths of prehistoric great rivers whose inshore depths attract gamefish. In the Gulf of Mexico, the canyons also provide access to offshore oil and gas reserves. While onshore oilfield names are primarily descriptively prosaic (the East Texas field, the Permian Basin, etc.), offshore field names-at least, so the facts here would suggest-tend more towards whimsy. This matter involves production from the Tubular Bells field, located in the Mississippi Canyon off New Orleans, and the neighboring Gunflint field.

         Production from oil fields below thousands of feet of water is, to my mind, an engineering marvel. Once the oil is located, the wells are installed and the oil and gas pumped from deep underground, the job is only begun-the product must be transported to an onshore facility for processing and refining. The installation at issue here-the Tubular Bells platform[1]-is designed for that task; it is a floating manifold moored in the Mississippi Canyon that receives oil and gas, and pumps it ashore. It was built to serve the Tubular Bells field by the Defendant, Williams Field Services - Gulf Coast Company, L.P. ("Williams"). Williams currently owns 51% of the company that owns the facility, Gulfstar One, LLC ("Gulfstar," or, the "Company"). The remainder is owned by the Plaintiff, Marubeni Spar One, LLC ("Marubeni").

         As will be explained in detail below, the interests of the two litigants in the profits from Gulfstar are provided by contract. In simplified form, the contracts provide that the net revenue from Gulfstar's Tubular Bells field operation is split 51% to Williams, 49% to Marubeni.

         As described above, however, the Tubular Bells platform is a manifold or "hub," it can receive oil and gas from more than one source. The parties provided for Marubeni to have the option to participate should Gulfstar have the opportunity to handle product from new fields. If Marubeni chooses to participate, revenue from these new projects (each, an "Expansion Project") is split 87.75% to Williams and the remainder to Marubeni, net of expenses incurred. Marubeni has participated in one Expansion Project, which serves the Gunflint field.

         The parties' disagreement, and this Action, involves which expenses are "incurred" in connection with the Gunflint Project. Williams contends it is the out-of-pocket costs of hooking Gunflint into the Tubular Bells platform, and the project's direct operating costs. This reading allocates the fixed costs associated with the Gulfstar installation to the Tubular Bells distribution. Because Williams' percentage of profit is higher from Gunflint, this reading is in its economic interest. Marubeni, unsurprisingly, takes the view that all expenses should be allocated between the two projects; this reading is in its economic interest. Marubeni asks for a judgment vindicating its position, and seeks specific performance and damages, via this suit.

         Williams has moved to dismiss, citing what it contends is the plain language of the contracts at issue. Marubeni has moved for partial summary judgement also alleging that I may decide the meaning of the contracts solely from the language therein.

         The technology employed by all parties exploiting the oil reserves of the deep-water Gulf of Mexico is mind-boggling. These are engineering projects of the most sophisticated type. The legal issue, by contrast, is mundane. Upon review of the documents at issue in light of the complaint, I find that the intention of the parties is unclear, and interpretation would benefit from a record. Therefore, the cross-motions are denied with respect to the contract claims.

         My reasoning follows.

         I. BACKGROUND[2]

         A. The Company and the Parties

         Gulfstar is a Delaware limited liability company[3] and a midstream oil and gas company.[4] Gulfstar owns a floating production system moored 135 miles southeast of New Orleans, Louisiana in the Gulf of Mexico.[5] Gulfstar's production system "acts as a hub that aggregates and combines production handling services with oil and gas export pipeline services, which feed downstream oil and gas gathering and processing services on the Gulf Coast."[6]

         Williams[7] is a Delaware limited partnership, and both a Member and the Operating Member of Gulfstar.[8] Williams has a 51% Percentage Interest in Gulfstar.[9]

         Marubeni is a Delaware limited liability company and a Member of Gulfstar.[10]Marubeni invests in infrastructure projects for oil and gas production, processing, transportation, and distribution.[11] Marubeni has a 49% Percentage Interest in Gulfstar.[12]

         B. Tubular Bells and Marubeni's Investment

         Williams' parent company, Williams Partners, founded Gulfstar in 2011 to "provide oil and gas handling services for Tubular Bells, a deepwater oil and gas field in the Gulf of Mexico."[13] Gulfstar's first platform (the Tubular Bells platform)- intended to service the Tubular Bells field-was engineered to process 60, 000 barrels of oil per day and 132 million standard cubic feet of gas per day.[14]

         Marubeni became a Member in Gulfstar on January 18, 2013 when Williams and Marubeni entered into a Contribution Agreement.[15] Pursuant to the Contribution Agreement, Marubeni was issued a 49% Percentage Interest in Gulfstar in exchange for a cash contribution of $187 million.[16] Gulfstar is governed in part by an Amended and Restated Operating Agreement (the "LLC Agreement") and an Operating Member Services Agreement (the "Operator Agreement"), [17] each between Marubeni and Williams and effective as of April 1, 2013.[18]

         C. The LLC Agreement and Operator Agreement

         The LLC Agreement and the Operator Agreement delineate standards of conduct for Williams as the Operating Member. Williams "shall manage and control the Company's business, properties and affairs to the best of its ability and shall use commercially reasonable efforts to carry out the business of the Company."[19] Additionally, Williams "shall perform the Operating Services[20] in a timely manner in accordance with the Prudent Operating Standards."[21] Section 5.15 of the LLC Agreement notes:

Notwithstanding any provision of this Agreement . . . (a) Williams and any successor Operating Member shall have no liability under this Agreement or otherwise to the Company or any Member for any actions taken in its capacity as Operating Member or for any actions it fails to take unless it breaches its obligations under this Agreement as a result of its gross negligence, fraud or willful misconduct . . . .[22]

         The Operator Agreement has a similar provision:

Operating Member shall have no liability to any Non-Operator Indemnitee, [23] and each Non-Operator Indemnitee hereby releases Operating Member from any liability, under this Operating Member Services Agreement or otherwise in connection with the Project or the performance of Operating Member Services by Operating Member or its failure to perform any such services unless Operating Member commits a breach of its obligations under this Operating Member Services Agreement involving Operating Member's gross negligence, fraud or willful misconduct.[24]

         Important to this Action, the LLC Agreement contains a formula to distribute Gulfstar's Available Cash.[25] Section 4.3.2 reads:

Within thirty (30) days following the end of each Quarter ending after the date of First Production an amount equal to 100% of Available Cash with respect to such Quarter shall, subject to Section 18-607 of the Delaware Act, be distributed by the Company in accordance with this Article 4 (ALLOCATIONS AND DISTRIBUTIONS) as follows:
(a) first, to Williams an amount equal to the lesser of (i) the Handling Amount with respect to such Quarter and (ii) the amount of GAAP Net Income of the Company with respect to such Quarter,
(b) second, to Williams until Williams has received cumulative distributions pursuant to this Section 4.3.2(b) in an amount equal to the Third Party Production Amount with respect to such Quarter and all prior Quarters,
(c) third, to Williams an amount equal to the Positive Value Amount, if any, with respect to such Quarter, and

(d) thereafter, to the Members in accordance with their Percentage Interests.[26]

         This dispute centers on the definition of Third Party Production Amount ("TPPA") as used in Section 4.3.2(b). From Marubeni's Verified Complaint (the "Complaint"), it appears that the TPPA is $0 for distributions from Tubular Bells whereas the TPPA is positive for other projects as discussed below, leading to divergent distribution outcomes.

         D. Expansion Projects and Sole Risk Projects

         The Tubular Bells platform was designed with the ability to expand production by the construction of new projects able to utilize the platform's "facilities and resources."[27] The LLC Agreement allows either Williams alone, or both Williams and Marubeni, to participate in the construction, and share in the proceeds, of a new project.[28] Put simply, if Marubeni decides not to participate in a new project, the project is a "Sole Risk Project," and "Williams receives all of the benefits and incurs all of the costs associated with that project."[29] Conversely, if Marubeni decides to participate in a new project, the project is an "Expansion Project" and "Marubeni and Williams share distributions and costs according to the terms of the LLC Agreement."[30]

         The TPPA "specifies how net proceeds associated with any Expansion Project . . . are to be distributed."[31] TPPA:

means the product of (a) any cash inflows received by the Company derived from Third Party Producer Agreements or production otherwise handled pursuant to an Expansion Project less associated cash outflows (including capital expenditures, operating expenditures and any other costs associated with such Expansion Project) incurred by the Company in connection therewith, and (b) 75%; provided, however, that this term shall not include revenues or associated costs related to Sole Risk Projects.[32]

         Since Williams is to receive the TPPA pursuant to the distribution waterfall in Section 4.3.2 of the LLC Agreement, Williams receives 75% of the amount in clause (a) of the TPPA definition.[33] The remaining 25% falls to the bottom of the waterfall to be distributed "to the Members in accordance with their Percentage Interests."[34]Since Williams owns a 51% Percentage Interest in the Company, it receives 51% of this remaining 25%.[35] Williams is thus due 87.75% of the net proceeds of an Expansion Project. This contrasts to 51% of net proceeds for production from the Tubular Bells field.[36]

         E. The Gunflint Project

         The Company has developed one project other than Tubular Bells, the Gunflint Project ("Gunflint").[37] Gunflint is an Expansion Project.[38] "[A]ll projects, present . . . and future, of the Company" derive benefits from certain expenditures already undertaken by Gulfstar in connection with the Tubular Bells platform.[39]Williams, as the Operating Member, has not allocated certain costs to Gunflint, and instead has allocated them solely to Tubular Bells.[40] According to the Complaint, these costs include:[41] "(a) Operating and maintenance costs associate[sic] with Export Pipelines, [42] (b) Operating and maintenance costs associated with Hull and Mooring, [43] (c) Selling, General and Administrative expenses, [44] (d) Third Party Producer revenue sharing, [45] (e) Operating Member Fee, [46] (f) Handling Amounts, [47]and (g) ARO Expenditures.[48]"[49] Marubeni alleges that the allocation of costs between Tubular Bells and Gunflint by Williams is inconsistent with the TPPA language in the LLC Agreement. That disagreement spawned this Action.

         F. Procedural Background of this Action

         Marubeni filed the Complaint on December 14, 2018. On March 7, 2019, Williams made two Motions: (i) to dismiss all counts of the Complaint other than that for a declaratory judgment or to stay such counts pending resolution of the declaratory judgment count and (ii) to stay discovery and for a protective order.[50]Marubeni subsequently moved for Partial Summary Judgment on April 29, 2019.[51]I heard Oral Argument on all outstanding Motions on October 10, 2019. During Oral Argument, at the request of Marubeni, I allowed Marubeni until October 18, 2019 to reconsider certain of its Counts. On October 18, 2019, Marubeni wrote me that all Counts remained. I considered the Motions submitted for decision on that date.

         The Complaint pleads five Counts.

         Count A asserts breach of contract against Williams. It alleges that Williams has not properly allocated costs "associated with" Gunflint and consequently breached (i) the LLC Agreement by failing to "use[] commercially reasonable efforts" in managing the Company[52] and (ii) the Operator Agreement by failing to "perform Operating Services in accordance with Prudent Operating Standards."[53]

         Count B asserts breach of fiduciary duty against Williams. It alleges that Williams "owes Marubeni and the Company fiduciary duties" as the Majority Member and Operating Member of Gulfstar and breached those duties by "failing to allocate costs associated with Gunflint to Gunflint."[54]

         Count C asserts breach of the "duty" of good faith and fair dealing against Williams. It alleges that Williams is breaching such duty by "engaging in unreasonable conduct which has the effect of preventing Marubeni from receiving the fruits of its bargain and frustrates the overarching purpose of the LLC Agreement."[55]

         Count D requests a declaratory judgment with a "final determination of the duties and obligations of the Operating Member" regarding the costs that must be allocated to Expansion Projects.[56]

         Count E requests "an injunction requiring Williams to allocate costs associated with Expansion Projects to Expansion Projects and refrain from and avoid any further breaches of its contract obligations."[57]

         II. ANALYSIS

         Williams has moved to dismiss this Action pursuant to Chancery Court Rule 12(b)(6).[58] The standard of review for a Rule 12(b)(6) motion is well settled:

(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are well-pleaded if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the nonmoving party; and (iv) dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.[59]

         When reviewing a motion to dismiss, the court may take into consideration documents "incorporated into the pleadings by reference and may take judicial notice of relevant public filings."[60]

         A. The TPPA Definition

         Notwithstanding the myriad of Counts pled by Marubeni, all relief sought in the Complaint hinges on whether Williams' cost allocation for Gunflint comports with the definition of TPPA. Resolving that issue requires an interpretation of that definition. In Delaware, "the proper interpretation of language in a contract is a question of law," and, "[a]ccordingly, a motion to ...

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