# Am. Midstream, LLC v. Rainbow Energy Mktg. Corp. Supreme Court of Texas, No. 23-0384 **Am. Midstream, LLC v. Rainbow Energy Mktg. Corp., No. 23-0384 (Tex. May 23, 2025). Holding: Section 9.1's plain language excused AMID from providing balancing services on any day Transco required AMID or Rainbow to limit imbalances of whatever type, scheduled or physical, attributable to Rainbow, so the courts below erred by blue-penciling "scheduled" and "physical" into it; AMID did not repudiate and made no false representation, and lost profits from Rainbow's untried forward-sales strategy would be speculative.** Practice areas: breach of contract, fraud, oil and gas, contract interpretation ## Key issues - Courts may not blue-pencil words into a contract: the trial court erred by adding "scheduled" and "physical" to Section 9.1 of a firm gas-balancing agreement, whose plain language excused the pipeline from providing balancing services whenever the upstream pipeline required the pipeline or the shipper to limit imbalances attributable to the shipper. - The Court rendered judgment for the pipeline on the shipper's repudiation and fraud, fraudulent-inducement and negligent-misrepresentation claims, remanded the breach-of-contract claims for a new trial, and cautioned that lost profits from an untested forward-sales strategy dependent on volatile gas prices are speculative. ## Factual History Rainbow Energy Marketing Corporation, a gas-trading company, had contracts to transport natural gas through the Transco and Magnolia pipelines, and American Midstream (Alabama Intrastate), LLC (AMID) owns the Magnolia (Opinion, PDF p. 2). Seeking to leverage the balancing flexibility AMID had under its operational balancing agreement with Transco, Rainbow executed in February 2015 the MAG-0005, a "Firm Gas Transportation Agreement" that in practice was a balancing agreement under which Rainbow could withdraw up to 20,000 MMBtu per day from the Magnolia without simultaneously supplying it, so long as it resupplied by the end of the month (Opinion, PDF pp. 3-5). Section 9.1 excused AMID from providing balancing services if Transco, as an upstream or downstream party, requested or required AMID or Rainbow to balance receipts and deliveries of gas attributable to Rainbow, and Transco could require that by issuing an Operational Flow Order (OFO) (Opinion, PDF pp. 4-5). After Transco began limiting imbalances more strictly in 2016, AMID told Rainbow it could not always provide the full service and, on a December 2016 call, that the MAG-0005 was "interruptible, subject to the approval or being under [the] radar with Transco"; Rainbow kept operating for over a month and terminated in February 2017 (Opinion, PDF pp. 6-7). ## Procedural History Rainbow sued for breach of contract, repudiation, fraud, fraudulent inducement, and negligent misrepresentation, seeking over $6 million in lost profits for its inability to enter additional forward sales contracts, and AMID counterclaimed for breach (Opinion, PDF p. 7). After a bench trial, the trial court read Section 9.1 as excusing AMID only when Transco required it to balance "scheduled" quantities or "physical" deliveries, found breach, repudiation, fraud, and negligent misrepresentation, and awarded Rainbow over $6 million (Opinion, PDF pp. 8-10). A divided First Court of Appeals affirmed, and the dissent would have rendered judgment for AMID on repudiation and the tort claims and remanded the contract claims because the trial court inserted qualifiers into Section 9.1 (Opinion, PDF pp. 10-12). AMID petitioned for review on July 27, 2023, and Rainbow responded on December 22, 2023; the Court requested merits briefing on January 26, 2024, granted the petition on October 18, 2024, heard argument on January 13, 2025, and decided the case on May 23, 2025 (Docket; Opinion, PDF pp. 1, 24). ## Issues Presented AMID presents whether the court of appeals disregarded the rules of contract construction by inserting words into the parties' contract, whether it lowered the bar for repudiation, whether it created an unsupported exception to the election-of-remedies doctrine, and whether it blessed a speculative lost-profits model (Brief on the Merits (American Midstream, LLC), PDF p. 12; Petition for Review (American Midstream, LLC), PDF p. 10). Rainbow presents whether the trial court correctly held that AMID breached, repudiated, fraudulently induced and negligently misrepresented, whether it correctly awarded $6,145,215.89 in lost profits, and whether AMID should take nothing on its counterclaim (Brief on the Merits (Rainbow Energy Marketing Corporation), PDF p. 11). The Court decided the proper interpretation of Section 9.1 and its consequences for the contract, repudiation, tort, and lost-profits rulings, without reaching the election-of-remedies issue (Opinion, PDF pp. 12, 15-16, 21). ## Standard(s) of Review The Court interprets a contract by first looking to its language, giving effect to the parties' intentions as expressed in the agreement and the language's plain, grammatical meaning; courts may not rewrite agreements to insert provisions parties could have included or disturb the risk allocation the parties agreed to (Opinion, PDF pp. 12-13). ## Legal Arguments **How Section 9.1 should be interpreted.** **Petitioner (AMID):** The court of appeals' majority inserted words into the contract, as the dissent explained, and that threshold error infected its findings on breach, repudiation, and fraud, as well as on election of remedies and lost profits (Brief on the Merits (American Midstream, LLC), PDF pp. 6, 42). **Respondent (Rainbow):** The trial court correctly interpreted Section 9.1, which let AMID refuse firm balancing service in two scenarios, and the court of appeals' decision does not merit further review; the added words merely distinguish point-to-point imbalances from single-point imbalances (Brief on the Merits (Rainbow Energy Marketing Corporation), PDF p. 33; Opinion, PDF p. 14). **Whether AMID repudiated and made false representations, and whether the lost-profits award stands.** **Petitioner (AMID):** A repudiation must be clear and unequivocal, and the majority lowered that bar by finding repudiation in statements that fall far short of it; the lost-profits model rested on a strategy Rainbow never used (Brief on the Merits (American Midstream, LLC), PDF pp. 6, 12; Petition for Review (American Midstream, LLC), PDF p. 10). **Respondent (Rainbow):** AMID repudiated by calling the firm agreement interruptible, its representations about firm balancing service induced Rainbow to contract, and its damages model computed lost profits with reasonable certainty (Brief on the Merits (Rainbow Energy Marketing Corporation), PDF p. 11; Opinion, PDF pp. 9, 14). ## Stated Reasons the Court Should Take the Case AMID argued that the court of appeals created a broad, unprecedented exception to the election-of-remedies doctrine, disregarded fundamental teachings on contract construction by inserting words into the contract, and undermined the reasonable-certainty test for lost profits by blessing a made-for-litigation damages model (Petition for Review (American Midstream, LLC), PDF p. 10). ## Oral Argument - **Who was directed.** Asked whether Transco requested or required balancing, AMID's counsel said Transco directs a request to either AMID or Rainbow, and every direction in this record went to Rainbow. (Oral Argument, 0:07:43) - **Two limitations.** Asked about the two limitations in Section 9.1, AMID's counsel agreed the second does not apply here but said the first, aimed at Rainbow as shipper, is triggered. (Oral Argument, 0:13:15) - **Rainbow's reply.** Asked about the exchange in which AMID offered 15,000, AMID's counsel said Rainbow thanked it and made no complaint, objection, or nomination for service. (Oral Argument, 0:09:22) - **Damages.** Asked whether the Court must reach damages if it accepts AMID's reading of Section 9.1, counsel said no, but the lost-profits model independently fails reasonable certainty. (Oral Argument, 0:15:51) - **Not interpretation.** Asked whether treating contract interpretation as repudiation is its position, Rainbow's counsel said no: AMID's statements said it would not provide the service guaranteed under the contract. (Oral Argument, 0:29:56) - **Continuing breach.** Rainbow's counsel said AMID's ongoing acts of breach change when Rainbow could act on the repudiation, and at a minimum require the trial court's consideration. (Oral Argument, 0:36:27) ## Practice Area Tags breach-of-contract, fraud, oil-and-gas, contract-interpretation ## Procedural Posture/Vehicle Petition for review from the First Court of Appeals after a bench trial; argued January 13, 2025, and decided May 23, 2025 (Opinion, PDF pp. 1, 8-10, 24). ## Amicus Involvement - [David R. Dow of University of Houston Law Center](https://search.txcourts.gov/SearchMedia.aspx?MediaVersionID=2ab8ecdb-d150-4016-8757-d3c531b5beda&coa=cossup&DT=BRIEFS&MediaID=a7fd9c73-f454-4c4a-9203-4b517f899846) filed an amicus curiae brief on October 30, 2023, at the petition stage. ## Holding Section 9.1's plain language excused AMID from providing balancing services on any day Transco required AMID or Rainbow to limit imbalances of whatever type, scheduled or physical, attributable to Rainbow, so the courts below erred by blue-penciling "scheduled" and "physical" into it; AMID did not repudiate and made no false representation, and lost profits from Rainbow's untried forward-sales strategy would be speculative (Opinion, PDF pp. 12-24). ## Court's Reasoning **Interpretation of Section 9.1.** The trial court's reading added the words "scheduled" and "physical," which appear nowhere in the text, and materially changed its meaning (Opinion, PDF pp. 12-13). Rainbow argued that the added words distinguish point-to-point from single-point imbalances, but the parties agree sentence one concerns point-to-point imbalances and sentence two single-point imbalances, so the "and" and "or" already did that work; a point-to-point imbalance can be either scheduled or physical, and the text does not distinguish between them (Opinion, PDF pp. 14-15). The trial court's reading would also limit sentence one to a scenario that never occurs, since Rainbow never had a scheduled imbalance, rendering the sentence meaningless (Opinion, PDF p. 15). **Contract claims.** The Court reversed and remanded for a new trial on both parties' breach-of-contract claims to determine on which days AMID failed to provide balancing services and whether a Transco mandate excused it, including the disputed question whether OFOs that left the "affected shipper" box blank applied to Rainbow (Opinion, PDF pp. 15-17). **Repudiation.** A party repudiates by a distinct and unequivocal absolute refusal to perform, and the other party must treat the refusal as unconditional (Opinion, PDF pp. 17-18). Viewed in the context of the entire December 2016 call, AMID expressed a willingness to continue operating under Transco's stricter practices, its description of the agreement as "interruptible" meant a Transco mandate could excuse performance, and Rainbow agreed to "huddle up" and kept operating for over a month, so the Court rendered judgment for AMID on repudiation (Opinion, PDF pp. 18-19). **Tort claims.** AMID's representation that it could provide firm balancing service subject only to the express limits in the contract was true under a proper reading, and Rainbow knew before contracting that AMID maintained daily imbalances as large as 40,000 MMBtu; any alleged representation that conflicted with the express terms could not be justifiably relied on, and Rainbow cannot convert its contract claim into torts, so judgment was rendered for AMID on fraud, fraudulent inducement, and negligent misrepresentation (Opinion, PDF pp. 19-21). **Lost profits.** For guidance on remand, the Court explained that lost profits require proof of fact and amount with reasonable certainty and cannot rest on profits dependent on uncertain market conditions or a new and unproven enterprise (Opinion, PDF pp. 21-22). Rainbow had never used the daily market or the MAG-0005 to fulfill forward sales contracts, and with gas prices that swung from a few dollars to over a hundred dollars per MMBtu, its "insurance policy" theory was too speculative to support recovery (Opinion, PDF pp. 22-23). ## Disposition The Court reversed the court of appeals' judgment, rendered judgment for AMID on Rainbow's repudiation and tort claims, and remanded for a new trial on Rainbow's and AMID's breach-of-contract claims (Opinion, PDF p. 24). ## Vote Breakdown Justice Sullivan delivered the opinion of the Court; Justice Devine did not participate in the decision (Opinion, PDF p. 1). --- Source: The SCOTX Report, https://scotxreport.com/cases/23-0384. AI-generated summary of the Court's opinion, orders and the parties' briefs, with pin cites to the page of each document; verify against the Court's own documents at search.txcourts.gov.