Steelhead Midstream Partners, LLC; Strategic Energy Income Fund III, Lp; Eagleridge Energy II, LLC; And Eagleridge Midstream, LLC v. Cl III Funding Holding Company, LLC

Supreme Court of Texas
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No. 22-1026
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Steelhead Midstream Partners, LLC; Strategic Energy
Income Fund III, LP; Eagleridge Energy II, LLC;
and Eagleridge Midstream, LLC,
Petitioners,

v.

CL III Funding Holding Company, LLC,
Respondent

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On Petition for Review from the
Court of Appeals for the Second District of Texas
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PER CURIAM

In this long-running dispute between co-owners of a pipeline, the
court of appeals held that the petitioner’s breach-of-contract claim is an
impermissible collateral attack on the judgment in an earlier foreclosure
suit involving the same parties. We disagree. Although the two cases
are closely related, the judgment in the foreclosure litigation did not
necessarily decide the contractual dispute raised in this litigation. On
top of that, the petitioner attempted to litigate its contractual claim in
the earlier foreclosure suit, but the respondent successfully convinced
the foreclosure court that it lacked jurisdiction over the contract claim.
Under these circumstances, litigation of the contract claim in a later suit
is not barred. The judgment of the court of appeals is reversed, and the
case is remanded to that court for further proceedings.
In 2011, WBH Energy and U.S. Energy Development entered a
joint operating agreement to develop oil and gas leases in Montague
County. Each had a 50% interest and was to pay 50% of the costs,
including costs related to construction of a pipeline. WBH defaulted on
its $413,000 share of the pipeline costs in 2014. The construction
company filed a mineral contractor lien on the pipeline under
Chapter 56 of the Property Code.
CL III Funding, the respondent in this Court, acquired WBH’s
50% interest through bankruptcy in 2015. Later that year, U.S. Energy
assigned its 50% interest to Strategic Energy, which created Steelhead
Midstream Partners to operate the project. We will refer to the
respondent as “CL III” and to the multiple, aligned petitioners
collectively as “Steelhead.” CL III and Steelhead executed another joint
operating agreement, which again stated that each owner had a 50%
interest in the pipeline and each was responsible for 50% of the costs.
The pipeline remained subject to the construction company’s lien.
In 2016, CL III paid $350,000 to the construction company in exchange
for the right to assert the construction company’s lien against the
pipeline. Thus, at this point, CL III owned both 50% of the pipeline and
the right to foreclose on its own pipeline. CL III then filed a foreclosure
suit in Montague County, by which it sought to force its co-owner,
Steelhead, to pay off the construction debt now owed to CL III.

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Steelhead responded with a counterclaim asserting that CL III breached
the joint operating agreement by failing to pay its share of the
construction costs that gave rise to the lien. In Steelhead’s view, CL III
owed the remaining construction debt, which it inherited from WBH,
and it could not collect that debt from Steelhead, whose predecessor had
already paid its share of the construction debt.
CL III sought dismissal of Steelhead’s breach-of-contract
counterclaim for lack of jurisdiction because Steelhead had already
submitted the claim to a federal court in the separate bankruptcy
proceeding. The Montague County trial court agreed with CL III and
dismissed Steelhead’s breach-of-contract counterclaim with prejudice
for lack of jurisdiction. The court then issued an order holding that
CL III held a valid and perfected lien encumbering Steelhead’s 50%
interest in the pipeline. The court rendered final judgment to that effect
and directed a foreclosure sale of Steelhead’s 50% interest in the
pipeline. To avoid foreclosure, Steelhead paid the judgment of over
$400,000. Steelhead did not appeal.
Steelhead filed this lawsuit in Tarrant County (under the JOA’s
forum selection clause) against CL III in August 2017, before final
judgment in the Montague County foreclosure case. Steelhead brought
a single claim: breach of contract (the joint operating agreement) based
on CL III’s failure to pay its alleged portion of the debt, which resulted
in the subsequent foreclosure on Steelhead’s 50% interest. After a bench
trial, Steelhead prevailed and won a judgment of approximately
$2 million against CL III.

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On appeal, CL III argued that Steelhead “litigated—and lost—
the prior Montague Lawsuit declaring CL III’s lien claims valid and
enforceable. . . . Nevertheless, in a true collateral attack, [Steelhead]
maintained this second Tarrant Lawsuit for breach of the Montague
Agreement . . . .” (Emphasis added). The court of appeals agreed.
655 S.W.3d 844, 864 (Tex. App.—Fort Worth 2022). It reasoned that the
Montague County foreclosure suit necessarily determined the status of
the debt and the parties’ rights under the joint operating agreement
because CL III could not foreclose without proving it was owed the debt.
Id. As a result,
Because [Steelhead’s] breach of contract action is premised
on CL’s “sole,” “individual[]” liability for the [construction]
debt, the breach of contract action is an attempt to
collaterally attack the foreclosure judgment and avoid its
binding, legal effect. We agree with CL that this is an
impermissible collateral attack.

Id. (emphasis added). The court of appeals reversed and rendered a
take-nothing judgment for CL III. Id. Steelhead petitioned for review.
In this Court, CL III embraces the court of appeals’ view that a
judgment in its favor in the Montague County case necessarily
foreclosed Steelhead’s breach-of-contract claim, which now amounts to
a collateral attack on the Montague County judgment. CL III argues as
follows:
The Montague Judgment decided far more than mere lien
perfection status. Chiefly, it determined that CL III did
not solely owe the [construction] debt. If CL III had owed
the debt, it could not have foreclosed (a complete
merits-based defense). Both parties litigated that material
issue, and the Montague Judgment ruled in CL III’s favor.
Although [Steelhead’s] Tarrant Lawsuit later sought relief

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sounding in contract, the second action was again premised
on CL III’s alleged status as the sole debtor and lack of
authority to foreclose. That material issue cannot be
re-litigated in a second action.

This argument overreads the effect of the judgment in the
Montague County foreclosure case. We can assume, as CL III contends,
that the Montague County judgment necessarily decided that CL III did
not solely owe the construction debt underlying the lien. It may
nevertheless be the case, as Steelhead asserts, that CL III owes a
separate contractual debt to Steelhead. Asking which of two parties
owes a particular debt, to whom it is owed, and whether a lien securing
the debt is enforceable, is conceptually distinct from asking whether the
two parties have a JOA under which they have separately agreed, quite
apart from the debt or the resulting lien, to share all expenses as
between themselves. Whether the construction debt was owed by
Steelhead is primarily a question about the parties’ obligations to the
construction company under the agreements giving rise to that debt.
Similarly, whether the debt was owed to CL III is primarily a question
about the agreements by which CL III acquired the debt. Whether
CL III has a separate obligation under the JOA—rather than under the
debt instruments or the lien—to pay some amount to Steelhead after the
foreclosure litigation to settle the parties’ accounts under their JOA is
not a question the foreclosure judgment necessarily decided.
In other words, even if the foreclosure judgment is fully correct
and binding with respect to the matters it covers, it may still be true
that CL III has breached its agreement with Steelhead by acquiring the
lien and using the foreclosure litigation to avoid its obligations under

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the JOA. Properly understood, Steelhead’s Tarrant County lawsuit
seeks to establish not that the result of the foreclosure litigation was
incorrect, but that the result of the foreclosure litigation triggers
contractual obligations CL III owes to Steelhead. These issues are
closely related, to be sure, but they are not so tightly tethered that the
resolution of one necessarily decides the other.
CL III is therefore incorrect that the judgment in the Montague
County case necessarily foreclosed Steelhead’s related
breach-of-contract claim. Nor did the judgment purport, on its face, to
do so. Quite the opposite. The judgment decreed in relevant part that
“the Subject Lien is a valid and perfected mineral contractor lien under
Chapter 56 of the Texas Property Code in the amount of $413,030.00.”
Neither the judgment nor any of the court’s other statements
commented on the status of contractual obligations between Steelhead
and CL III. In fact, CL III’s motion for summary judgment expressly
asked the court to focus on the validity of the lien CL III acquired from
the construction company and not to consider the related issue of how
CL III and Steelhead had contractually allocated their various
obligations as between themselves. The motion states that it “focus[es]
exclusively on validity and scope of the [construction] lien,” that
Steelhead’s counterclaims (including its counterclaim for breach of
contract) “do not impact the issues presented in this motion,” and that
the trial court lacked jurisdiction to hear the counterclaims.
Ideally, of course, all these related matters would have been
litigated at once. The familiar rule of res judicata prohibits follow-on
litigation of claims that were or could have been decided in a prior

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action. Rosetta Res. Operating, LP v. Martin, 645 S.W.3d 212, 225 (Tex.
2022). Steelhead, however, attempted to avoid duplicative litigation by
bringing its breach-of-contract claim as a counterclaim in the Montague
County foreclosure suit. CL III responded by convincing the court that
it lacked authority to decide Steelhead’s counterclaims because of
related bankruptcy proceedings. Having argued successfully that the
Montague County court lacked the power to decide the foreclosure claim
and the contract claim at the same time, CL III is hardly in a strong
position to now contend that the contract claim is forever barred because
it was not litigated at the same time as the foreclosure claim. As we
recently observed, “[i]t is neither a punishment nor unfair to hold a party
to its prior position when the first court adopted that position and,
because of that adoption, the party obtained the result it sought.”
Fleming v. Wilson, 694 S.W.3d 186, 193 (Tex. 2024).
For these reasons, the court of appeals erred by concluding that
Steelhead’s breach-of-contract claim is an impermissible collateral
attack on the judgment in the Montague County suit. CL III raised
other grounds for reversal that the court of appeals did not reach.
Therefore, without hearing oral argument, see TEX. R. APP. P. 59.1, we
grant the petition for review, reverse the court of appeals’ judgment, and
remand to the court of appeals for further proceedings consistent with
this opinion.

OPINION DELIVERED: December 31, 2024

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