This post is a summary of a more detailed Client Alert prepared by Gray Reed’s labor and employment practice group.

Recall our recent post on the Department of Labor’s new “Economic Realities Test” for classifying specialized contractors and consultants as either employees or independent contractors. The new rules make the compliance minefield much riskier. The DOL has now provided guidance on how it will apply the Test.

The prior post discussed the six factors to assess if a worker is economically dependent on the company (an employee) or truly in business for themselves (a contractor).

The most critical clarifications from the DOL involve analyzing:

  • the nature of the investments made,
  • the degree of control exerted, and
  • whether the worker’s skills involve entrepreneurial initiative.

Investments: The DOL will look at qualitative similarity rather than just dollar amounts. For example, a company man providing his own specialized tools and equipment could be viewed as making a similar investment in the company, even if the company’s investment is higher.

Degree of Control:  The DOL acknowledges operators, material and equipment providers, landmen and others may need to exert certain control to comply with industry regulations without making the worker more likely to be classified as an employee. But exceeding what regulations require, such as excessive monitoring or approval processes, could signal an employment relationship.

Skill and Initiative: The DOL focuses on whether contractors market their skills to different businesses. An expert deployed to work solely for one company wouldn’t indicate contracting, while those marketing their skills more broadly would.

Ultimately: The test analyzes overall economic dependence. Contractors must be truly in business for themselves rather than relying on and being controlled by one company as their main revenue source.

Employer: Take a close look at your contractor relationships and honestly assess their entrepreneurial independence. Are they building their own business and client base, or are they economically reliant on the company?

Worker: You should do the same.

Your musical interlude

Frontier Drilling, LLC v. XTO Energy, Inc. has the indicia of an inequitable result, but as I remind my wife every time she objects to what she deems to be an outrageous jury verdict, we don’t know all the facts and the court’s gotta follow the law, so let’s not judge.

The facts

Drilling contractor Frontier and operator XTO were parties to a drilling contract that was amended several times by negotiations via oral and/or email communications and then written agreements memorializing the discussions.  Frontier’s Rig 27 was moved to a site where a certain blowout preventer was required. Frontier offered to install the BOP in exchange for a one-year contract extension. XTO emailed Frontier, “ … XTO will need the 10000 BOP stack immediately. Can we just do an amendment on the stack and another separate amendment later?”

Frontier said yes and sent the amendment to be executed. The contract stated that XTO’s execution would serve as the amendment. Having not received the XTO-signed copy, Frontier emailed XTO, stating that they are in the process of taking the BOP to the rig and asked for the signed agreement. XTO responded, “Please consider this email as authorization to execute the swap … Management is traveling and is in the process of approval.”  Six months later XTO said it would not execute the amendment and would not pay the costs associated with the installation.

Frontier sued. XTO asserted that the parties never reached an agreement and in any event, such an agreement would violate the Statute of Frauds. XTO’s motion for summary judgment was granted and the case was dismissed.

The SOF applies to any agreement in which performance cannot be completed within one year. The court said it did not have to decide if the parties reached an agreement because if they did, the SOF would render the agreement unenforceable. The agreement would be effective in February 2020 and it would not be completed until December 2021. The SOF applied and barred enforcability.

Was the contract signed?

The parties disputed whether the agreement was signed by the person to be charged. XTO’s “Please consider this email as authorization … ” email did not satisfy the signature requirement. Under the Texas Uniform Electronic Transactions Act, if a law requires a signature an electronic signature satisfies the law if the transaction is between parties who have both agreed to conduct the transaction by electronic means.

Whether the parties had such an agreement is determined from in the context and surrounding circumstances, including the parties’ conduct. The court concluded that every prior contract and amendment consisted of a written agreement signed by both parties. Their conduct did not demonstrate an agreement to conduct transactions via email. In fact, it demonstrated the opposite.

Performance?

Performance can constitute an exception to the SOF. Under the full performance exception, the SOF does not apply “where one party has fully performed under the contract and the only thing remaining is performance by the other party.” Although Frontier installed the BOP, it did not provide Rig 27 for XTO’s use through December 2021. Frontier did not fully perform.

The partial performance exception allows for equitable enforcement of a contract that otherwise fails to comply with the SOF when the contract is partially performed and denial of enforcement would amount to virtual fraud. But the partial performance must be unequivocally referable to the agreement and corroborative of the fact that a contract actually was made. Frontier’s installation was not unequivocally referable to the alleged agreement because Frontier had previously installed a BOP on a different rig free of charge.

That the court was “sympathetic to Frontier’s predicament” didn’t alter the result.  

Your musical interlude

Landowner and mineral owner (that includes you, lessee): Under ETC Texas Pipeline, Ltd. v. Ageron Energy, LLC, your right to sue for damages for tort or trespass could pass into history before you even know you have a claim. Here’s why:

Under the legal-injury rule (more on that later), a property claim based on trespass or tort accrues even if the claimant:

  1. Does not yet know a legal injury occurred,
  2. Has not yet experienced or gained knowledge of the full extent of the injury,
  3. Does not yet know the specific cause of the injury or the party responsible,
  4. Later suffers additional injuries. or
  5. Has not yet suffered or cannot yet ascertain any or all of the resulting damages.

The background

In 2012 mineral lessee Swift and landowners the Quintanilla Ranch and the Dickinson Ranch sued Regency Field Services (now ETC) for tort and trespass in connection with Regency’s H2S disposal well. See our previous posts for a history of that case.

The Supreme Court ruling reversing the

Court of Appeals ruling

The new dispute

In 2021 Ageron obtained a permit to drill an Eagle Ford Shale well on mineral leases on the Dickinson Ranch. The well was located near ETC’s H2S disposal well. Ageron’s permit application included a 40-page H2S contingency plan.

Despite extensive safety precautions, H2S ate through Ageron’s drill pipe, severing it at 61 feet into ETC’s injection zone in the Wilcox formation. The well was abandoned and Ageron’s leases expired. Ageron sued ETC for negligence, nuisance, and trespass, assessing its damages at $197 million.

ETC moved to dismiss based on Ageron’s lack of standing, arguing that the H2S claims accrued in 2012 to the Dickinson Ranch owners. The trial court denied the motion. The court of appeals reversed and dismissed Ageron’s suit.

The legal-injury rule.

For a court to have subject matter jurisdiction over a case the plaintiff must have standing to sue.  The right to sue belongs to the person who owns the land when the injury occurs and does not pass to a subsequent owner without an express assignment.

A claim for trespass to a mineral lessee’s rights accrues when unauthorized conduct first invades or interferes with the claimant’s legal rights. Hence, the admonition at the beginning of this post.  This results in accrual of not only claims arising from this injurious event but also all other claims the owner might have had arising from the same allegedly wrongful conduct, whether ripe or not.

The single-action rule

A trespass or tort committed against an undivided estate involves only a single, indivisible action for all co-owners. If Jeffrey Dickinson’s present and future mineral interest claims arising from the injection operation accrued no later than November 2012, when his cows died from escaping H2S similar claims of all other Dickinson Ranch owners, including the Dickinson lessor on whose tract Ageron’s well sat, also accrued then.

Ageron did not have standing as a mineral lessee because it did not have assigned claims from a prior landowner or lessee.

Note: The court declined to decide whether a mineral-development claim accrues only after a drilling attempt fails. Regardless, Argeron’s claim failed because of the single-action rule.

The dissent

The dissent reasoned that, per the Supreme Court in Lightning Oil, an unauthorized interference with the place where the minerals are located is a trespass as to the mineral estate only if it infringes on the mineral lessee’s ability to exercise its rights.

Argeron’s petition should be construed as intending a “trespass on the case” for its claimed injury to its right to develop the leasehold. As pleaded, Ageron’s injury is concrete and particularized, not hypothetical.

The Dickinson family’s claims in the prior suit were different from Ageron’s, and any claim the Dickinsons would have had for injury to their right to develop their minerals would be premature. The Dickinson family’s pleading failed to allege any such injury.

Relying on the single-action rule requires future operators to bring causes of action when damages are impossibly speculative and premature. The majority’s conclusion conflates a surface owner’s trespass-to-possessory-rights cause of action with a trespass cause of action belonging to a mineral lessee who sustains an injury while developing its mineral interests.

Your musical interlude.

According to Darkhorse Water LP v. Birch Operations Inc. et al., the form of an instrument affecting real property in Texas does not affect the interest conveyed by the instrument. It’s what the document says about the transaction, not what the document calls itself. And you are reminded (because you know should this) that, other than for good reasons in limited occasions, nothing good comes from failing to promptly record an agreement affecting real property in the public records.

The dueling agreements

When Billie Pat McCaskle signed a Saltwater Reclamation, Treatment, Water Purchase and Saltwater Disposal Agreement with Darkhorse on his (or hers, not sure, don’t make me say “their”, there’s only one of ’em) 20 percent interest in a tract of land. The agreement was promptly recorded in the Public Records of Martin County, Texas.  Three weeks before the Darkhorse agreement, Billie Pat and the other McCaskles signed a Surface Lease Agreement with two Birch entities. That agreement was not recorded until 19 months later.

The Darkhorse Agreement granted to Darkhorse the exclusive right to

  • Drill for, produce, treat and transport water for sale to third parties;
  • Utilize the property for disposal of saltwater and other waste produced from oil and gas leases;
  • Drill and equip brine wells and freshwater wells, or saltwater disposal wells;
  • Use and operate the facilities to reclaim or treat wastewater, produced brine water and fresh water.
  • Construct pipelines and flow lines to transport produced water;
  • Construct roads and facilities convenient for Darkhorse’s enjoyment of the conferred rights.

Billie Pat would be paid royalties of a percentage of the amounts received by Darkhorse from its operations. There was a habendum clause (“… for as long thereafter, … ) similar to that found in an oil and gas lease.

It was a sale of reservoir storage space

Did the Darkhorse agreement grant an ownership interest in the property sufficient to allow Darkhorse to assert a claim to quiet title against Birch? To answer that question the court had to determine if the Darkhorse agreement was a sale of an ownership interest in real property or a merely a traditional occupancy lease.

The Darkhorse Agreement was a grant of a determinable fee interest in the subsurface reservoir storage space, or the subsurface matrix, of the property. The exclusive ownership of Billie Pat’s undivided interest in the reservoir storage space was conveyed to Darkhorse during the life of the agreement for the purpose of saltwater disposal. Accordingly, Darkhorse had a sufficient property interest under its agreement with Billie Pat to bring an action to quiet title against Birch.

Was Darkhorse a bona fide purchaser?

Time, and a trial after remand, will tell. The court declined to render judgment on Darkhorse’s suit to quiet title. Such a claim is based on Darkhorse not having prior notice of the Surface Lease Agreement. It seems like Birch could have avoided this entire mess by timely recording its agreement in the Official Public Records of the county.

A bona fide purchaser is one who acquires property in good faith, for value, without notice, constructive or actual, of any third-party claims or interests. A bona fide purchaser prevails over a holder of a prior unrecorded deed or other unrecorded interest in the same property. Darkhorse had not met its burden at the trial court to establish that it was a bona fide purchaser. The court of appeals remanded to determine Darkhorse’s claim to quiet title and for an accounting.

Your musical interlude

Antero Resources Corp. v. C & R Downhole Drilling, Inc. et al, proves again the extreme risk when one bites the hand that feeds him. Shoutout to Greek poet Sappho, 600 BCE.He She (oops) probably had a Dalmation. Antero sued former employee Kawsak and his accomplices Robertson and his companies for breach of fiduciary duty, fraud, and unjust enrichment. The jury award Antero $11.1 million against Kawsak in actual damages, $775,000 as recoupment for the value Kawcak received as a result of the breach, ad forfeiture of 130,000 shares of stock in Antero Midstream. It could have been worse. The district court had denied Antero’s request that Kawcak disgorge $12 million in salary and vested stock, reasoning that Antero was made whole with the damage award.

Why is it a big deal?

A “fiduciary duty” apples to a person who occupies a position of particular confidence towards another and requires a higher standard of behavior than in just about any other relationship. Employees owe the duty to their employers.

The bad acts

Kawcak was Antero’s Marsellus Shale operations supervisor. From 2011 to 2015 he arranged to hire companies owned by his close friend Robertson to perform post-frac drillout operations. Kawsak and Robertson were “dealing under the table”, as the court described it. Kawcak gave Robertson confidential information on Antero’s other drillout vendors so that Robertson could underbid the competition. As if winning the contracts wasn’t enough, Robertson’s companies deliberately took longer than necessary to conduct operations, and employees dropped tools down the well, brought faulty equipment to well sites, and allowed other equipment to freeze.  All of this resulted in costly delays.

During the five-year period Kawcak received $2.6 million in salary and bonuses and unrestricted stock grants from Antero. during the same time, Kawcak received a private jet and $729,000 in cash payments from Robertson.

Damages – close enough

On appeal Kawcak challenged the calculation of Antero’s damages. Antero’s expert Taylor determined that Robertson’s companies took longer to carry out operations than other drill-out vendors beginning in similar working conditions, accounting for uncontrollable delays and site-specific conditions.  He opined that Antero’s loss caused by the inefficiencies was $11.1 million.

Kawcak claimed that there was uncertainty as to the fact of Antero’s out-of-pocket damages, which in Texas is fatal to recovery. The court concluded that Kawcak’s argument really went to the amount of damages, not the fact of them. Kawcak was arguing that Taylor failed to prove $11.1 million of overbilling, not that he failed to prove overbilling at all.

According to Kawcak Taylor should also have done an invoice-by-invoice analysis. But it didn’t follow that Taylor’s testimony was no evidence at all. Perhaps Antero could have offered a more precise estimation of how the Robertson companies overbilled it, said the court, but all that was required was an estimate of damages with a reasonable degree of certainty. Taylor’s method was a “perfectly rational way” of approximating overbilling.

Competitors’ rates don’t matter

Kawcak alleged that Taylor’s testimony was faulty in that he didn’t consider what rates competing drillout contractors charged. Evidence of a competitor’s rate is not necessary to prove out-of-pocket damages. Plus, Kawcak’s testimony was found to be not reliable and not credible.

Potential offset for Robertson settlement

All wasn’t lost for Kawsak. The court concluded that the district court should have allowed him an opportunity to conduct discovery on how much Antero received in settlement from Robertson and to ask for an offset from the award. The case was remanded for that purpose.

Your musical interlude, Mardi Gras edition.

A lot, it turns out. The Biden Administration, bending the knee to the progressive wing of the Democratic Party, has paused approval of new LNG export facilities. (In terms of influence on the President, this “wing” is looking more like the breasts, the thighs and drumsticks, the other wing, and the piece that went over the fence last. No news from the giblets).  

What would a permanent ban, which could result after the government conducts its “robust” examination of LNG exports, look like? In NR Capital Matters, Andrew Follett refers to it as a “strategic crippling that would cost already wavering American allies to reconsider cozying up to the Kremlin, cut the heart out of the booming American natural gas industry, and likely increase American energy prices in the long term.” What other choices would our allies have? Europe’s already dwindling economic output will diminish even further, and the US will forego the opportunity to reduce our trade deficit. Other perils abound: increasing use of CO2-emitting coal is an obvious one and losing market share in Asia to ambitious Qatar and Iran is another.

The move was not popular everywhere. It will immediately shut down four pending projects at enormous cost to investors and lost jobs.

“Here’s reality: LNG is going to be produced. It is going to be sold on the global market. It is going to be used. Those things will happen whether new export terminals are built or not,” says Andrew Stuttaford in National Review’s Capital Matters. A ban will not impact global warming.

Virtue abounds

The mayor of London has signed on to a treaty sponsored by the World Economic Forum requiring London to ban meat, dairy and private car ownership by 2030, says Timothy Gardner of Planet Today. It’s the initiative from the C40 Cities (C40Cities,org). The proposals include “climate action plans” that include “consumption interventions” such as prohibiting citizens from purchasing no more than three items of clothing a year and flying more than once every three years. I want to be there when they tell Leonardo DiCaprio, John Kerry, and their fellow climate warriors. The details are vague and inisidously non-threatening.

Speaking of Davos, the new exquisitely coiffed president of Argentina, Javier Milie, presented the argument for a capitalist alternative to the socialist leaning group-think of the global elite attendees.

… and of governments. Here is a cute story about two governors, a coyote and a dog.

Are you being told the truth?

“Falsehood flies, and truth comes limping after it so that when men come to be undeceived, it is too late; the jest is over, and the tale hath had its effect.” Jonathan Swift.

… which leads to the myriad untruths your government is telling you about the journey to “Net Zero”, says James Varney in RealClearInvestigations. How much land is required for a windmill? Orders of magnitude more than you are being told.

And dissent is stifled says John Murawski in RealClearInvestigations. He cites the critics’ reasoning, banned from the official discourse, behind why there should not be concern about a “crisis”. Remember, the ones who control the data control the debate.

Your musical interlude.

The Department of Labor recently made key changes to its rules in a way that will affect the oil and gas sector. The new rule rescinds a Trump Administration rule that had simplified the process of classifying workers as independent contractors. In its place, the DOL returned to the previous, complex and flexible “Economic Realities Test” which requires an employer to analyze the totality of the circumstances of an individual’s engagement under the following factors:

  • The worker’s opportunity for profit or loss depending on managerial skill;
  • The investments by the worker and the employer;
  • The degree of the permanence of the work relationship;
  • The nature and degree of the employer control;
  • The extent to which the work performed is an integral part of the employer’s business; and
  • The worker’s use of skill and initiative.

This worker-friendly change will complicate the employee classification process, and employers must prepare for the uncertainty and potential liabilities it will bring.

The “New” Test

Employers will now be required to undertake a complex analysis focusing on the six factors above to determine whether a worker should be classified as an “employee” or an “independent contractor.” This test generally favors an “employee” finding and requires an employer to decide whether the worker is essentially working for themselves, and thus properly classified as an independent contractor, or dependent on the employer for work, and thus properly classified as an employee.

Previously, under the Trump rule, the focus of the analysis centered upon the “core factors” of:

  • The nature and degree of control over the work; and
  • The worker’s opportunity for profit or loss based on initiative with the remaining factors serving as additional guidance when these core factors did not point to the same classification.

This test favored employers and made an employer’s decision to classify a worker as an independent contractor much easier and more defensible.

Now, each of the six factors are to be given equal weight under the totality of the circumstances when determining a worker’s appropriate classification. Employers must juggle these six “realities” of the relationship to form their best guess at a worker’s appropriate classification. This approach complicates the analysis and allows for multiple interpretations of a worker’s proper classification, so employers will find it more difficult to avoid suits for misclassification under federal wage and hour rules. Note, the new test applies only to the DOL’s interpretation of the Fair Labor Standards Act, and you must remain cognizant of state regulations and interpretations of your state’s wage and hour rules.

What Employers Need to Know

Employees are entitled to protections, like minimum wage guarantees and overtime protections, which independent contractors are not. The new Economic Realities Test gives workers more avenues to challenge their classification and will result in increased litigation. To limit these potential liabilities and best prepare for the newly complexified classification process, employers should consider the following:

  • Analyze your workforce:
    • Determine which workers or categories of workers may now be at risk of being classified as employees and take appropriate actions such as reclassifying them.
  • Are your policies up to date?
    • Review policies, procedures, and handbooks to ensure compliance with the Economic Realities Test.
  • Conduct necessary training:
    • Ensure that those in human resources and positions with hiring authority are trained on the new test and are up to date on best practices.
  • Seek legal counsel:
    • Work with counsel to ensure compliance with the new rule and to conduct these analyses to avoid potential errors and the associated liabilities.

If you have questions regarding these or other employment-related questions, please contact Ruth Ann Daniels, head of Gray Reed’s Labor and Employment Practice Group.

Your musical interlude.

In Texas, no. Read on to learn why. In Nortex Minerals LP v. Blackbeard Operating LLC et al, the question was the meaning of this limited assignment provision in the “Alliance Leases”, oil and gas leases covering 27,000 acres of the Alliance Airport in Tarrant County:

Except as provided herein, Lessee may not assign or otherwise transfer an interest in this Lease without prior written consent of Lessor, which consent may be granted or denied in the sole and absolute discretion [,] and without such consent, any instrument purporting to assign or otherwise transfer of this Lease shall be void. Lessee shall have the right to transfer this Lease in its entirety without obtaining consent of lessor if such transfer of the Lease is (i) part of a merger, sale of membership interests or combination of Lessee and other entity [,] or a sale of all or substantially all of Lessee’s assets or (ii) as part of a transaction in which the transferee is a publicly traded energy company with a market capitalization in excess of $1 billion.[ ] Items (i) and (ii) are referred to herein as “Permitted Transfers[.”]  

This diagram depicts the transactions leading to the litigation. The opinion provides details that I’m assuming you don’t need to know and don’t have time for.

The Court said that its sole task was to ascertain whether the limited assignment provision required Blackbeard and co-defendant Bluestone Natural Resources II to obtain Nortex’s consent before “transferring ownership” to co-defendant Diversified Production. The Court agreed with the trial court that the sale of equity in Bluestone did not constitute a transfer of an interest in the leases and did not trigger Nortex’s consent rights.

How did the court get there?

In reaching its conclusion the Court relied on the plain language of the unambiguous limited assignment provision. The framework to be used to answer the question would be:

  1. Determine if a transfer occurred. If yes;
  2. Determine whether it was a “Permitted Transfer”. If not;
  3. Was the provision an unenforceable restraint on alienation?

The linchpin: No “transfer”

The Court ended its analysis after the first step because the equity sale did not constitute a transfer by a lessee. Blackbeard’s sale of the equity in Bluestone occurred through a series of mergers, with Bluestone retaining its interest in the leases after the mergers were completed.

According to Business Organization Code §10.008(a)(2)(C), the effect of a merger is not a transfer of title. To agree with Nortex would rewrite the provision so as to require a change of control. The leases contained no change of control provision and the Court refused to add one.

Nortex focused on the carveout for Permitted Transfers. Because there was no transfer, there was no Permitted Transfer.

Nortex’s argument emphasizing the merger portion of the limited assignment provision was unsuccessful because for there to be a carveout there must be a transfer of the lease and that did not happen.

Nortex focused on “an interest in this lease” but, again, ignored that there must be a transfer, which did not occur.

An evidentiary point

The limited assignment provision was unambiguous. Because the final, amended version superseded all prior versions the Court saw no need to consider the history and context of the provision.

Your musical interlude.

We haven’t presented 2023’s Bad Guys in Energy, but we have SEC v. Bowen, Baker, Cannon Operating and others as an example of garden variety securities fraud. The opinion addresses a defendant’s effort to defeat the SEC’s fraud claim by attacking the complaint. The “bad guys” are only alleged at this point. 

Bowen, Baker and others raised $2.1MM from 140 investors for Cannon Operating. Bowen solicited investors directly and he and others, none of whom are registered brokers, received commissions. Bowen reviewed and edited offering materials written by Baker which included a private placement memorandum and a “Prospect Book”.

SEC’s allegations (among others)

  • The materials contained misleading information; for example, production from one of Canon’s prior wells was continuing at “massive rates”;
  •  Subsequent actions of the defendants did not comport with statements in the materials;
  • Defendants failed to correct misstatements and omissions in the materials;
  • Investor funds were misused by payment of sales commissions;
  • A promised segregated bank account was never opened;
  • 85% of the funds promised for program costs did not happen;
  • Bowen’s name as Cannon’s CEO was omitted from the materials. Due to prior securities violations he was barred from selling securities;
  • The materials failed to disclose negative information about Cannon and Baker;
  • Cannon never drilled one of the wells.

Alleged violations

  • §10(b) of the Securities Exchange Act of 1934 and Rule10b-5 by engaging in fraud in the offer and sale of securities;
  • §17(a), 5(a), and 5(c) of the Securities Act of 1933 by engaging in the unregistered offer and sale of securities and offering and selling securities as unregistered brokers.

The result

Bowen moved to dismiss the fraud claims. Here is the analysis (with omissions):

  • The SEC’s pleadings must meet a “facial plausibility standard”;
  • The SEC cannot allege malice, intent, knowledge and other conditions of Bowen’s mind generally. The “who, what, when, where, and how” standard was not met;    
  • To be liable for a misstatement or omission Bowen must be the maker of the statement. The SEC did not plausibly allege that Bowen made the statements. Mere knowledge of another’s violation of Section 10b-5, or even aiding and abetting a violation, is not sufficient to establish primary liability under the Exchange Act;
  • The Securities Act does not require that the defendant make the statement. Obtaining money by means of an untrue statement encompasses a broader range of conduct than making a statement. The SEC plausibly alleged that Bowen obtained money by means of untrue or misleading statements; 
  • The SEC met its burden to plausibly allege material misstatements or omissions. Materially requires the substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available; 
  • The allegation that Bowen’s name was not mentioned in the materials was sufficient because it alleged that the materials concealed the fact that Bowen previously had been sanctioned by the SEC;
  • Failing to allege when Bowen helped prepare the documents did not adequately allege fraud based on the omission of Bowen’s identity;
  • The SEC failed to allege scienter –  the mental state that embraces an intent to deceive and manipulate or defraud which includes severe recklessness. Fraud cannot be predicated on incentive compensation, on one’s title or position, or paying commissions as directed by one’s employer.

The court granted Bowen’s motion to dismiss but gave the SEC a mulligan. Bowen has not escaped the clutches of the SEC.

Your musical interlude.

Contacted at his seaside villa, Captain Renault exclaimed his shock that Elsie and Adrian Opiela are asking the Texas Supreme Court to review questions surrounding the Railroad Commission’s approval of a drilling permit for a Production Sharing Agreement well.

The Commission’s “65% Rule” for multi-tract horizontal wells is invalid because the Commission does not have the authority to make such a rule. There must be either valid pooling authority or compliance with the Mineral Interest Pooling Act, neither of which were present here. The Commission adopted the ad hoc 65% Rule for issuing horizontal well permits without following formal rulemaking procedures required by the Administrative Procedure Act.  

You might recall that the Austin Court of Appeals confirmed the Commission’s decision to approve a permit without considering the anti-pooling provision in the Opiela’s oil and gas lease. The court also found that the Commission was wrong in concluding that the permit applicant Magnolia Oil & Gas Operating had shown a good faith claim of right to drill the well. We discussed the court of appeals opinion here and the district court ruling here.

The Opielas challenge the court of appeals ruling on several grounds. Here is our (oversimplified?) summary of Opiela’s assertions in their petition for review:

The 65% Rule

In permit applications for horizontal wells across multiple tracts, the operator represents that it will allocate production according to a formula that the mineral interest owners have not agreed to. The Commission may not issue such permits when the mineral and royalty owners have not consented to pooling or how to allocate production.

The Commission routinely approves permits for wells across tracts without determining whether it has authority to develop its approval policies and without notice to the mineral and royalty owners of property rights that are affected by the Commission’s actions.

The anti-pooling clause

The Court of Appeals incorrectly held that pooling authority was not necessary to drill the PSA well because pooling of tracts is not expressly required by Texas statutes or regulations for horizontal drilling for a wellbore that crosses property lines.

The Court of Appeals incorrectly held that even if the Commission did consider the anti-pooling clause, the clause was not implicated because a permit for horizontal drilling under a PSA is not pooling under Texas law. There is no functional distinction between pooling and PSA/allocation wells.

In determining whether Magnolia had a good-faith claim to drill a horizontal well across Opiela’s tract the Commission ignored a clause in Opiela’s lease that prohibits pooling “in any manner whatsoever”. With this clause in place, Magnolia cannot have a good-faith claim to drill a well.

Determination of parties’ property and contract rights

The Court of Appeals incorrectly concluded that the Commission was not required to consider the anti-pooling clause because the Commission has no power to adjudicate parties’ rights under a lease or other title documents.

The anti-pooling clause in the lease is relevant because, while the Commission lacks authority to make the binding determination of property rights it does have the authority and duty to examine property rights in the performance of its regulatory responsibilities to determine whether an applicant has a good-faith claim.

The Commission’s APA-compliant rules recognize that a good-faith claim for creating a pooled unit requires appropriate contractual authority and such authority is not present here.

There’s more to come on this.

Your musical interlude