The Texas Business Court has made it clear that in order to satisfy its amount in controversy jurisdictional threshold when only unpaid royalties are sought under a breach of contract claim, the amount in controversy is limited to the actual damages, meaning the royalties actually accrued and owed at the time the lawsuit was filed. This does not include the lifetime value of all royalties that might ever become due under the royalty agreement.
In Black Mountain SWD, LP v. NGL Water Solutions Permian, LLC, the Court remanded the lawsuit to state court after rejecting the defendant’s attempt to inflate the amount in controversy by including future royalty payments that the plaintiff had not sought in its pleadings.
Key Takeaways
- It is important to assess what the petition is actually seeking. When a plaintiff sues for the amount of unpaid payments under a contract, the amount in controversy is the sum of those past-due payments and not the theoretical value of all future payments under the agreement.
- A party seeking to remove a case from state court to the Business Court bears the burden of establishing jurisdiction. If the plaintiff presents evidence that the amount in controversy falls below the Court’s amount in controversy threshold, the defendant must then present controverting evidence, not just argument, raising a fact issue to avoid remand.
The Dispute
Black Mountain SWD, LP (“Black Mountain”) and NGL Water Solutions Permian, LLC (“NGL”) entered into a royalty agreement that was executed pursuant to a purchase and sale agreement. The royalty agreement entitled Black Mountain to a $0.03-per-barrel royalty for product transported through the pipelines the royalty agreement covered. Notably, the royalty was payable only on the volumes of product for which NGL received a transportation fee from a non-affiliated third party. The royalty was not payable for saltwater transported as a result of capacity balancing across current and future saltwater disposal assets.
NGL stopped paying royalties, after which Black Mountain believed that NGL had been avoiding paying royalties by mislabeling the transportation of saltwater and its associated fee. Black Mountain argued NGL was charging third parties a disposal fees, rather than a transportation fee, for transporting saltwater from well sites to an injection well. Specifically, Black Mountain asserted that over the span of five years, NGL categorized over 144 million barrels of saltwater as “capacity balancing” (which the royalty agreement excluded) and paid the royalty on only 22,102 barrels.
Black Mountain sued for breach of contract in Tarrant County state court, seeking actual damages exceeding $1 million. NGL then removed the case to Business Court without Black Mountain's consent, asserting that the Court had jurisdiction because the lifetime value of disputed royalties under the royalty agreement exceeded the $10 million threshold required for jurisdiction.
The Court’s Analysis
This is not the first time the Business Court analyzed the amount in controversy issue. In finding that the amount in controversy was not met and therefore the Court had no jurisdiction, the Court used the following framework from C Ten 31 LLC ex rel. SummerMoon Holdings LLC v. Tarbox:
1. When the petition alleges the amount in controversy, the pleading controls unless: (a) a party presents evidence that the amount is falsely asserted to wrongly obtain or avoid jurisdiction; or (b) a different amount in controversy is readily established, such as by statutory set fees;
2. When a plaintiff’s pleadings are silent as to the amount in controversy, but the removing party’s notice of removal properly pleads that the amount is within the Court’s jurisdiction, these pleadings will be given the same deference and will control absent the presence of section (a) and (b) described above; and
3. In either case, if a party presents evidence that the amount in controversy is outside of the Court’s jurisdiction, the Court will remand the case unless another party presents controverting evidence that raises a fact issue. If a fact issue exists, the party asserting jurisdiction will bear the burden of proof.
While NGL argued that the lifetime value of all royalties owed to Black Mountain under the royalty agreement exceeded $10 million, the Court rejected this argument, finding NGL did not meet its burden to establish the amount in controversy threshold.
First, the amount in controversy here is the amount of past damages for unpaid royalties. Per Black Mountain’s petition, the actual damages sought equal the amount of unpaid royalties per barrel of saltwater transported for unaffiliated third parties through the pipelines that are subject to the royalty agreement. Black Mountain, in turn, sought reimbursement for the non-payment of periodic royalties that had already accrued and were owed. Per the Court, the allegations did not demonstrate Black Mountain was seeking any future damages to protect non-monetary privileges or rights such as declaratory or injunctive relief.
Second, Black Mountain’s evidence established that the amount in controversy was no more than $4.5 million. Black Mountain presented evidence that the amount in controversy was outside of the Court’s jurisdiction. Specifically, Black Mountain presented a declaration from its CFO calculating $4,422,789.15 in royalties owed from the royalty agreement’s date of execution through the date the lawsuit was filed.
Third, NGL offered no controverting evidence to raise a fact issue. Turning to the burden shifting analysis, because Black Mountain presented evidence that the amount is outside the Court’s jurisdictional limits, NGL carried the burden to present controverting evidence but failed to do so. The Court indicated that while NGL’s counsel explained that basis for removal based on the petitions’ allegations, “counsel’s interpretation of Black Mountain’s allegations is not evidence establishing Black Mountain seeks more than $10 million in relief.”
The Court also addressed NGL’s argument surrounding the “theoretical recovery of royalties on discarded saltwater.” However, Blackwater’s pleadings did not bring into controversy the amount of all payments that could ever come due under the royalty agreement. The “proper inquiry is to ask what the parties seek to recover, not what they will recover or are likely to recover, when the pleadings are filed.” Accordingly, the Court’s analysis was limited to the amount due and owing on the contractual past-due royalties when the lawsuit was filed.
Why This Case Matters
This decision provides a roadmap for plaintiffs seeking to keep periodic-payment disputes out of the Business Court and notice to defendants hoping to remove them. The Court made clear that the amount in controversy turns on what the plaintiff actually seeks, not what the defendant believes could theoretically be at stake. For contracts involving ongoing payment obligations like royalties, the jurisdictional inquiry focuses on accrued amounts at the time of filing. Parties seeking removal must come prepared with evidence, not just arguments, if they want to establish the Court’s amount in controversy threshold.