Papalote Creek II, LLC v. Lower Colorado River Authority

Filing 41

ORDERED that Papalote's Motion for Summary Judgment # 36 is DENIED;FURTHER ORDERED that LCRA's Cross-Motion for Summary Judgment # 39 is GRANTED; and FINALLY ORDERED that Papalote's Motion to Strike Extrinsic Evidence # 32 is DISMISSED AS MOOT because the Court did not consider any of the evidence that Papalote sought to strike. Signed by Judge Sam Sparks. (td)

CH

r

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS 2019 AUG 26 PH 2:39
AUSTIN DIVISION
"-.

V

PAPALOTE CREEK II, LLC, f/k/a
Papalote Creek Windfarm II, LLC,
Plaintiff & Counter-Defendant,

CAUSE NO.:
AU-16-CA-01097-SS
AU-19-CA-00284-SS

-vs-

LOWER COLORADO RIVER
AUTHORITY,
Defendant & Counter-Plaintiff.
[I) .1 I)

BE IT REMEMBERED on this day the Court considered the file in the above-styled
cause, and specifically Plaintiff and Counter-Defendant Lower Colorado River Authority

(LCRA) 's Brief on the Merits [#30]; Defendant and Counter-Plaintiff Papalote Creek II, LLC
(Papalote) 's Brief on the Merits [#31]; Papalote' s Motion for Summary Judgment [#36];

LCRA's Response and Cross-Motion for Summary Judgment [#3 9]; and Papalote's Motion to
Strike Extrinsic Evidence [#32]. Having reviewed the parties' briefing, the relevant law, the
arguments of counsel, and the case file as a whole, the Court now issues the following opinion
and orders.

Background
I.

Introduction
In 2009, Papalote and LCRA entered into an agreement wherein Papalote agreed to build

an 87-turbine wind farm and LCRA agreed to purchase all of the energy produced by the farm, at
a fixed price, for the next eighteen years. See Papalote Br. [#31-1] Ex. A (Agreement). Papalote

1

completed construction of the wind farm in 2010, and for several years LCRA upheld its
obligation to purchase all of the energy produced by the farm.

See

id.

[#311 at

31

Sometime around 2014, however, energy prices dropped "precipitously," and LCRA
faced a choice. LCRA Br. [#30] at 7. It could either (a) continue to pay a relatively high fixed
cost for energy under the terms of the Agreement, or (b) breach the Agreement in order to take

advantage of the lower energy prices prevailing in the open market. Papalote Br. [#311 at 7;
LCRA Br. [#30] at 12-13. LCRA chose to breach the Agreement. LCRA Br. [#30] at 13. Now,

LCRA seeks a declaration that the terms of the Agreement limit the damages it owes to Papalote
for the breach.

II.

Contract Provisions
The Agreement contains several provisions concerning the damages and remedies in the

event of a breach by either party. For starters, the Agreement provides for liquidated damages.

Section 4.3 establishes that Papalote is entitled to liquidated damages in the event LCRA fails to
take and pay for all energy produced by the wind farm.

See

Agreement at 19 (describing these

liquidated damages as Papalote' s "exclusive remedy hereunder"). A corresponding provision,
§

4.2, establishes that LCRA is likewise entitled to liquidated damages in the event Papalote

breaches its obligation to deliver energy to LCRA. Id.
In addition to liquidated damages, a non-breaching party gains access to additional

remedies under

§

6.2 and

§

6.3

if the breaching party defaults by failing to remedy its breach in a

timely fashion. In that circumstance, the non-defaulting party gains the right to terminate the

Agreement and "accelerate all amounts then owing between the Parties." Id. at 22. The nondefaulting party may also demand the defaulting party pay a Termination Payment, which is
calculated according to a formula set out in

§

6.3. Id. at 22-23.

'In the interest of consistency, all page number citations refer to CM/ECF pagination.

Finally, and of particular importance here,

§

9.3 imposes some limits on aggregate

liability. Because the parties' dispute hinges on the interpretation of § 9.3, the Court excerpts the

provision in full:
9.3 Limitation on Damages for Certain Types of Failures.
Notwithstanding anything to the contrary in this Agreement,
Seller's aggregate liability for (i) failure of Seller to construct the
Project and/or (ii) failure of one hundred percent (100%) of the
Project's Turbines to achieve the Commercial Operation Date on
the Scheduled COD and/or (iii) failure of one hundred percent
(100%) of the Project's Turbines to achieve the Commercial
Operation Date on June 1, 2011 and/or (iv) a Termination
Payment, shall be limited in the aggregate to sixty million dollars
($60,000,000). Buyer's damages for failure to perform its material
obligations under this Agreement shall likewise be limited in the
aggregate to sixty million dollars ($60,000,000).

Id. at 28 (emphasis added).

III.

Procedural Posture
In October 2016, LCRA notified Papalote that it intended to stop taking energy under the

Agreement, and around the same time, it came to light that the parties did not agree on how to

interpret the last sentence of
§ 9.3

§

9.3. LCRA Br. [#30] at 13. LCRA believed the last sentence of

limited its aggregate liability to $60 million. Lower Cob. River Auth.

v.

Papalote Creek II,

LLC, 858 F.3d 916, 921 (5th Cir. 2017) (Papalote 1). Papalote disagreed, and then refused

LCRA' s request to arbitrate the parties' dispute regarding the proper interpretation of § 9.3. Id. at

919-20. In response, LCRA filed suit to compel arbitration. Id.
Eventually, the Fifth Circuit concluded the parties' dispute was not arbitrable, Papalote

Creek II., LLC v. Lower Cob. RiverAuth., 918 F.3d 450, 456 (5th Cir. 2019) (Papalote Ii), and
in March 2019, LCRA filed a separate lawsuit in this Court seeking a declaratory judgment that

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its aggregate liability under the Agreement is capped at $60

River Auth.

v.

Papalote Creek II, LLC,

million.2

Complaint, Lower Cob.

1:1 9-cv-00656-SS, ECF No. 1. This Court consolidated

that suit with the Fifth Circuit's remand of Papalote II and then heard oral arguments in August
2019 on the merits of the parties' dispute regarding the proper interpretation of § 9.3. See Order

of June 13, 2019 [#271; Tr. of Aug. 16, 2019 [#40]. The Court now proceeds to consider the
merits of the parties' claims.

IV.

Contract Interpretation
When construing contracts, Texas courts look first to the language of the parties'

agreement. Barrow-Shaver Res. Co.

v.

Carrizo Oil & Gas, Inc., No. 17-0332, 2019 WL

2668317, at *4_5 (Tex. June 28, 2019). If the text of a contractual provision can be given a

"certain or definite legal meaning or interpretation," then that provision is unambiguous and can
be construed by the court as a matter of law without the aid of extraneous evidence. Id. at 5. To
determine whether a contractual provision is ambiguous, the court must look at the language in
dispute and interpret the words used according to their "plain, ordinary, and generally accepted

meaning." Pathfinder Oil & Gas, Inc.

v.

Great

W.

Drilling, Ltd., 574 S.W.3d 882, 889 (Tex.

2019) (citation and quotation marks omitted). However, when interpreting and assigning

meaning to the terms used by the parties, the court must also consider the context provided by
the provision at issue and the contract as a whole. See id. ("Contract terms cannot be viewed in
isolation[]

. . .

because doing so distorts meaning.")

As noted above, the parties' disagreement hinges on the meaning and application of the
last sentence of § 9.3, which states that "[LCRA ' s] damages for failure to perform its material

obligations under this Agreement shall likewise be limited in the aggregate to sixty million

Papalote later counterclaimed for a declaratory judgment that the Agreement does not impose such a cap.
Answer & Counterclaims, Lower Cob. River Auth. v. Papalote Creek II, LLC, 1: 19-cv-00656-SS, ECF No. 5.
2

dollars ($60,000,000)." Agreement at 28. Within the scope of this broader interpretive

disagreement, the parties specifically dispute: (1) whether the last sentence of

§ 9.3

purports to

cap the damages LCRA might owe to Papalote for LCRA's failure to fulfill its material

obligations under the Agreement; (2) whether such a cap would apply to limit damages owed by

LCRA in aggregate or, conversely, whether the cap would only limit LCRA's liability for a

Termination Payment; (3) whether and to what extent a separate provision,
or overrides any cap imposed by

§

§

9.4, conflicts with

9.3; and (4) whether liquidated damage payments voluntarily

remitted by LCRA should count towards any cap imposed by

§

9.3.

The Court approaches these arguments sequentially and first assesses whether

§ 9.3

functions to impose a cap upon damages owed by LCRA to Papalote.
A.

Does § 9.3 Purport to Limit the Damages that LCRA Owes to Papalote?

LCRA contends the last sentence of § 9.3 limits the damages that LCRA owes to Papalote
in the event LCRA fails to perform its material obligations under the Agreement. LCRA Br.
[#30] at 5. Papalote reads the disputed language differently. Papalote Br. [#31] at 3. According to

Papalote, the phrase "LCRA's damages" refers to damages that LCRA would be entitled to
receive

if LCRA failed to perform its material obligations. Id. Thus, under Papalote's preferred

interpretation, the last sentence of

§

9.3 caps the damages that LCRA can receive for its own

breach of contract and, correspondingly, does not cap the damages that LCRA would owe to
Papalote for breach of contract. Papalote tacitly acknowledges its interpretation of the disputed
language makes no
contractual

sensewhy

would LCRA be entitled to receive damages for its own

breach?but nevertheless contends the Court must adopt its interpretation because,

in Papalote' s view, its preferred construction represents the only conceivable interpretation of the

phrase "LCRA's damages." Papalote Br. [#3 1] at 9-11.

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Black's Law Dictionary defines "damages" as "[m]oney claimed by, or ordered to be
paid to, a person as compensation for loss or injury." Damages, Black's Law Dictionary (11th
ed. 2019). This definition does not clear up the interpretative dispute at issue here, which is how

to interpret the phrase "LCRA's damages." On the one hand, and when viewed in isolation,

"LCRA's damages" might be read to refer to money claimed by LCRA "as compensation for
loss or injury." On the other hand, "LCRA's damages" might also be read to refer to money

"claimed by, or ordered to be paid to" Papalote by LCRA.
Papalote insists the phrase "[LCRA's] damages" can only refer to damages that LCRA is

entitled to receive, and admittedly, Papalote's preferred reading is perhaps the most common

way to read the phrase "[LCRA's] damages." Papalote Br. [#31] at 9-10. But it is not the only
possible reading. Indeed, LCRA has cited many legal opinions which use the phrase "so-and-

so's damages" to refer to the damages owed by that person to someone else. See, e.g., Ruppert

v.

Alliant Energy Cash Balance Pension Plan, 726 F.3d 936, 940 (7th Cir. 2013) (recounting

defendant's efforts "to moot the lawsuit and by doing so reduce the defendant's damages");
Medlock

v.

Ortho Biotech, Inc., 164 F.3d 545, 552 (10th Cir. 1999) (considering whether jury

should have been instructed "that defendant's damages could be limited based on events that

took place after [plaintiffs] termination"); Fisher

v.

First Stamford Bank & Trust Co., 751 F.2d

519, 524 (2d Cir. 1984) (noting jury normally determines whether plaintiff "could have mitigated

defendant's damages"). If the Court were forced to read the phrase "[LCRA's] damages" in
isolation, that phrase would be ambiguous

becausein isolationthe phrase

is susceptible of

two divergent yet reasonable readings.
However, when interpreting and assigning meaning to the words used by the parties, the

court must also consider the context provided by the rest of the contractual provision as well as

the contract as a whole. Pathfinder, 574 S.W.3d at 889. Here, the context provided by the rest of
the sentence demonstrates the phrase "[LCRA's] damages" is susceptible of only one reasonable

interpretation. Under LCRA's preferred reading, the phrase refers to damages that LCRA would
owe to Papalote in the event that LCRA "fail[ed] to perform its material obligations" under the

Agreement. That reading of the phrase "LCRA's damages" makes sense in the context in which
it appears. Conversely, under Papalote's preferred reading, the phrase refers to damages that
LCRA would receive for failing to perform its own material obligations. That makes no sense at
all, because in the event that LCRA breached its material obligations, Papalote would be the

party entitled to receive damages, not LCRA.

In sum, the phrase "[LCRA's] damages" is susceptible of two reasonable interpretations
when viewed in isolation. Because oniy LCRA's reading of "[LCRA's] damages" makes any
sense when that phrase is read in the context of the sentence in which it appears, the Court

concludes that the phrase "[LCRA's] damages" is unambiguous and that it refers to damages that
LCRA would owe to Papalote in the event LCRA failed to fulfill its material obligations under
the Agreement.
B.

Does § 9.3 Only Limit LCRA's Liability for a Termination Payment?

Since the Court concludes

§ 9.3

caps the damages that LCRA might owe to Papalote, the

Court now turns to assess the manner in which that cap applies. Papalote contends that because

the last sentence of

§

9.3 states that LCRA's damages are "likewise" limited to $60 million,

LCRA's damages must be limited in the same way that

§

9.3 limits the damages that LCRA can

receive from Papalote. Papalote Br. [#31] at 13-15
Section 9.3 limits Papalote's liability for damages in four separate scenarios. Three of

these scenarios are inapplicable to LCRA because they involve liability for failure to construct or

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operate the wind farm. Since Papalote is the party responsible for constructing and operating the

wind farm and since LCRA does not participate in either of those obligations, there is no
coherent means by which LCRA's liability in such scenarios might be "likewise" limited.
The fourth scenario delineated by

§

9.3 concerns Papalote's liability for a Termination

Payment. Papalote contends that by "likewise" limiting LCRA' s damages, the last sentence of
§ 9.3

similarly limits LCRA's liability for a Termination Payment, but not for liquidated

damages due under

§

4.3. Papalote Br. [#3l} at 13-15.

There are two problems with Papalote's proposed reading of "likewise." First, it doesn't

make a lot of sense. Of the four ways in which

§

9.3 cabins Papalote's liability for damages, only

one could possibly apply to LCRA. Second, and even more saliently, Papalote's reading would

require ignoring the fact that

§

9.3 explicitly limits LCRA's "damages for failure to perform its

material obligations." Agreement at 28 (emphasis added). Papalote's preferred reading elides
this limitation and instead rewrites the last sentence of

§

9.3 so that it limits LCRA' s damages

"for a Termination Payment" instead. But as Papalote has repeatedly pointed out, this Court is
constrained to interpreting the language of the Agreement as

writtenit cannot rewrite the last

sentence of § 9.3 to impose the narrower liability limitation that Papalote would prefer.
Papalote protests that

if the Court reads

§ 9.3

to limit LCRA's liability "for failure to

perform its material obligations," then the word "likewise" will have no meaning and will be
rendered surplusage. The Court disagrees. "Likewise" cannot reasonably be interpreted to mean

that LCRA's liability for damages is only limited with respect to a Termination Payment.
"Likewise" can, however, be reasonably interpreted to mean that just as Papalote's liability is
limited in certain circumstances to $60 million, LCRA's damages owed to Papalote for failure to

perform its material obligations are also limited in the aggregate to $60 million. Under this
reading, the word "likewise" simply means "also."3

The Court thus concludes the last sentence of § 9.3 means what it says and serves to limit
the aggregate damages owed by LCRA to Papalote "for [LCRA's] failure to perform its material

obligations" and not just for a Termination Payment.

C.

Does § 9.4 Conflict with or Override § 9.3?

Papalote next argues

§

9.4 conflicts with and overrides

LCRA's liquidated damages under

§

§

9.3 for purposes of calculating

4.3. Papalote Br. [#311 at 15-18. In relevant part,

§

9.4

states that "for any provision for which an express and exclusive remedy or measure of damages
is provided, such express remedy or measure of damages shall be the sole and exclusive remedy,
[and] the obligor's liability shall be limited as set forth in such provision[.]" Agreement at 28.

Papalote contends that because

§

9.4 states "liability shall be limited as set forth" in provisions

setting forth exclusive remedies, liability limitations appearing in other provisionssuch as
§

9.3are ineffective.4 Papalote Br. [#3 1]

at 15.

The problem with this argument is that
limited

solely

§

9.4 does not explicitly state liability shall be

as set forth in provisions establishing exclusive remedies. Papalote implies the

Court should insert the word "solely" into

§

9.4, so that it would then read: "[T]he obligor's

liability shall be limited solely as set forth" in any provision providing "an express or exclusive
remedy or measure of damages." Agreement at 28 (hypothetical insertion in italics). But the

Although under this reading "likewise" is arguably surplusage, in the Court's view, the word "also" can
nearly always be omitted without altering grammatical meaning of the sentence in which it appears. Nevertheless,
writers continue to use it, because even though it is redundant, it is a useful organizational tool that serves to
establish a parallel with whatever came before.
Papalote also makes a related argument that insofar as a conflict exists between § 9.3 and § 9.4, the Court
should interpret § 9.3 narrowly to avoid such a conflict. Papalote Br. [#311 at 16-17. But the Court has already
concluded that the last sentence of § 9.3 is unambiguous and susceptible of only one reasonable interpretation. See
supra Section IV.A.

Court eschews such an interpretation here because "Texas law generally mandates that one
contract provision not be interpreted in a way that nullifies another provision." Greater Hous.

Radiation Oncology, P.A.

v.

Sadler Clinic Ass 'n, P.A., 384 S.W.3d 875, 886 (Tex.

App.

Beaumont 2012, pet. denied).
On the other hand,

§

9.3 does explicitly limit LCRA's damages. Agreement at 28. What's

more, the liability limitations contained within

§

9.3 apply "[n]otwithstanding anything to the

contrary in this Agreement."5 For these reasons, the Court concludes that

§

9.4 does not affect or

nullif' the liability limitations established by § 9.3.
D.

Do Voluntary Payments Count Towards the Cap?

Finally, Papalote argues that even

if §

9.3 caps the aggregate damages that LCRA owes

to Papalote, the cap does not take effect until LCRA "fail[s] to perform its material obligations."
Papalote Br. [#31] at 21-22. Papalote contends LCRA has not yet failed to perform its material
obligations because, although LCRA is refusing to accept or pay for energy from Papalote, it has

been making liquidated damage payments as required by

§

4.3. Id. In this vein, Papalote argues

the liquidated damage payments made by LCRA thus far should not count towards the $60

million cap because they are not damages for failure to perform. Id.
The Court rejects Papalote's argument and concludes the damages paid by LCRA under
§

4.3 qualify as "damages for failure to perform its material obligations." Indeed, § 4.3 describes

the payments as damages, and LCRA is paying them because it has been refusing to accept or

pay for energy produced by Papalote's wind farm. In turn, accepting and paying for energy
Papalote argues the "notwithstanding" clause appended to the first sentence applies only to that
to the second sentencewhich limits LCRA's liability.
Papalote Br. [#31] at 17. The Court disagrees and concludes that by "likewise" limiting LCRA's liability for
damages, the second sentence of § 9.3 incorporates the "notwithstanding" clause included within the first sentence.
And even if it did not, § 9.3 would still control because § 9.3 explicitly limits LCRA's liability for damages, and
§ 9.4 cannot override that explicit limitation by generally stating that "liability shall be limited as set forth in such a
provision." See Pathfinder, 574 S.W.3d at 889 ("[A] specific contract provision controls over a more general one."
(internal citation and quotation marks omitted)).

sentencewhich limits Papalote's liabilitybut not

10

produced by the wind farm are two of LCRA's material obligation under the Agreement.
Because liquidated damages payments made by LCRA constitute damages "paid for failure to
perform

.. . material obligations," the Court concludes those payments count towards the

$60

million cap established by § 9.3.

Conclusion
The Court concludes the last sentence of

§

9.3 is unambiguous and subject to only one

reasonable interpretation. That interpretation limits to $60 million the aggregate damages that
LCRA must pay to Papalote for LCRA's failure to perform its material obligations. Further,
§

9.4 does not affect the application of § 9.3. Finally, the Court concludes the liquidated damages

paid thus far by LCRA count towards the $60 million cap established by § 9.3.

Accordingly,
IT IS ORDERED that Papalote's Motion for Summary Judgment [#3 6] is
DENIED;
IT IS FURTHER ORDERED that LCRA's Cross-Motion for Summary Judgment
[#39] is GRANTED; and

IT IS FINALLY ORDERED that Papalote's Motion to Strike Extrinsic Evidence
[#32] is DISMISSED AS MOOT because the Court did not consider any of the evidence

that Papalote sought to strike.
1

SIGNED this the

day of August 2019.
SAM SPARKS
U
SENIOR UNITED STATES DISTRICT JUDGE

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