When Foreclosure Doesn’t End the Story: The Texas Supreme Court Clarifies Contract Rights in Steelhead Midstream v. CL III
- Jonah Wilson
- 2 days ago
- 4 min read
In the world of Texas real estate, oil & gas, and pipeline ownership, disputes often blend contract obligations with lien rights and foreclosure actions. But what happens when one party uses foreclosure to force payment — while the other claims the real fight is really a breach of contract?
The Texas Supreme Court recently answered that question in Steelhead Midstream Partners, LLC v. CL III Funding Holding Company, LLC, and the ruling has major implications for joint ventures, co-ownership structures, and contractual disputes tied to lien enforcement.
Let’s break it down in simple terms.
A Tale of Two Co-Owners and One Pipeline
The conflict began when WBH Energy and U.S. Energy Development entered into a 50/50 Joint Operating Agreement (JOA) to build a pipeline in Montague County. Each side was responsible for half of the construction costs.
Things went off the rails when:
WBH failed to pay its $413,000 share.
A construction company filed a mineral contractor lien under Chapter 56 of the Texas Property Code.
Ownership later shifted:
CL III Funding acquired WBH’s 50% interest through bankruptcy.
U.S. Energy’s 50% interest was assigned to Strategic Energy, which formed Steelhead Midstream Partners.
A new JOA reaffirmed the same deal:50/50 ownership, 50/50 expenses.
The Twist: CL III Buys the Lien and Forecloses on Its Co-Owner
In 2016, CL III paid $350,000 to buy the lien from the construction company.
That meant CL III now held:
Half of the pipeline, and
A lien against the pipeline, including Steelhead’s 50% share.
CL III then filed a foreclosure lawsuit in Montague County, aiming to force Steelhead to pay the remaining construction debt — a debt Steelhead believed CL III owed under the JOA.
Steelhead Tries to Counterclaim — and Gets Blocked
Steelhead filed a breach-of-contract counterclaim in the foreclosure case, arguing:
CL III inherited WBH’s unpaid obligations and breached the JOA by failing to pay its half.CL III can’t foreclose on us for a debt they owe.
CL III pushed back, arguing the trial court had no jurisdiction to hear Steelhead’s contract claim because of related bankruptcy proceedings.
The trial court agreed and dismissed the counterclaim with prejudice.
The foreclosure judgment went through, and Steelhead paid over $400,000 to protect its ownership.
Steelhead Files a New Lawsuit — and Wins
Steelhead then filed a separate breach-of-contract lawsuit in Tarrant County, as allowed by the JOA’s forum-selection clause.
After a bench trial, Steelhead won $2 million against CL III.
The Court of Appeals Steps In: “This Is a Collateral Attack.”
CL III appealed the $2M judgment and argued:
The foreclosure judgment already decided who owed the debt.
Steelhead lost that issue once.
Steelhead’s new case was an impermissible collateral attack — an attempt to undermine the foreclosure judgment.
The Fort Worth Court of Appeals agreed and wiped out Steelhead’s victory.
The Texas Supreme Court Reverses: Contract Claims Survive Foreclosure
The Texas Supreme Court took a closer look — and saw things differently.
1. The foreclosure judgment did NOT decide the contract issue.
The foreclosure case only concluded:
The lien was valid.
It could be foreclosed.
It did not decide the parties’ contractual obligations under the JOA.
These are two distinct questions:
Who owed the construction company?
What do the co-owners owe each other under their contract?
The foreclosure resolved the first question — not the second.
2. Steelhead tried to litigate the contract claim in the foreclosure case.
CL III had argued that the Montague County court lacked jurisdiction to hear Steelhead’s counterclaim.
So Steelhead wasn’t allowed to litigate its contract claim in the foreclosure case.
The Supreme Court made it clear:
This was a major factor in restoring Steelhead’s right to pursue its contract claim.
3. This was NOT a collateral attack.
The court emphasized:
Steelhead wasn’t challenging the foreclosure judgment.
Steelhead accepted the foreclosure and paid it.
Steelhead was seeking contract damages, not overturning the foreclosure.
The foreclosure simply triggered the financial harm Steelhead claimed under the JOA.
The Final Word: Back to the Court of Appeals
Because the Court of Appeals stopped at collateral attack, it never considered CL III’s other arguments.
The Texas Supreme Court:
Reversed the Court of Appeals,
Reinstated Steelhead’s right to sue, and
Sent the case back for further review.
Why This Case Matters
This ruling offers important guidance for anyone involved in:
Joint operating agreements
Mineral contractor liens
Pipeline or infrastructure co-ownership
Foreclosure-related disputes
Real estate partnerships
Key Takeaways:
A foreclosure judgment doesn’t automatically resolve contract disputes between co-owners.
Parties can still be held liable for breaches of contract—even after foreclosure.
You cannot block a claim on jurisdictional grounds and later argue it should have been brought earlier.
Res judicata has limits when a claim was never allowed to be heard.
This decision strengthens the idea that contractual rights survive foreclosure, and foreclosure cannot be used as a shortcut to escape previously negotiated responsibilities.
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