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Energy & the Law

Haynesville Shale Fraud Judgment Reversed

Posted in Lease Disputes

Co-author Brooke Sizer

Vestiges of the early Haynesville Shale land rush remain.

Imagine: The lease is about to expire. Lessee (Mecom) offers lessor (Henderson) $90 per acre for an extension, telling him, “I could extend for two more years without consent so I’m giving you free money.” He explains his intention to drill more Cotton Valley wells on the Bossier Parish property. Henderson agrees to the $90, plus a royalty increase to 20%. Two months later Mecom sells the lease and other acreage to Petrohawk for $6,750 per acre.

Mecom’s work isn’t done. He couldn’t assign the lease without Henderson’s permission. After his sale Mecom flies to Shreveport to meet with Henderson and explains that the assignment was “just a chance to make money”, and offers to pay off his mortgage on the ranch, which he does. Henderson sues.

No misrepresentation – read your lease

In Henderson v. Windrush Operating Co., LLC, et al, Henderson claimed that the defendants (Mecom and the original lessee, Gaylord) deceived him about the terms of the lease and about their development intentions. But,

“A party who signs a written instrument is presumed to know its contents and cannot avoid its obligations by contending that he did not read it, that he did not understand it or that the other party failed to explain it to him.”

At trial Henderson was shown the continuous operations provision and agreed that the language “seems to say” that operations could extend the lease beyond its primary term.

The lease language supported Mecom’s statement that the lease could be extended. While the exact nature of the extension wasn’t disclosed during the discussion, a lessor is responsible for knowing what his lease says, said the court.

The court didn’t buy the trial court’s finding of an “ulterior motive” supporting Henderson’s claim that he was lied to about Mecom’s future intentions, citing the abrupt spike in land prices after the extension was negotiated.

No relation of confidence – I’m not the friend you thought I was

A ”relation of confidence” exists in Louisiana where there is a longstanding and close relationship between the parties due to numerous transactions. Courts have found this relationship in a family relationship, a 25-year long business relationship, and between spouses. Henderson only met Gaylord in 2005 and Mecom in 2007. The court concluded that the relationship here was not extensive and was limited to intermittent social and business interactions.

That Henderson assisted Mecom in obtaining leases from Henderson’s neighbors, Mecom gave Henderson a $10,000 Christmas present because “it was the right thing to do”, and they discussed going into the saltwater disposal business together, wasn’t enough to convince the court.

Takeaways

Lessee: In a fraud suit brought by the former local police chief, don’t expect to win at trial.

Lessor: Read your lease! Don’t rely on the unctuous words from your “friend”, the silky-smooth lessee.

Bonus observation: Congrats to Mecom III, who in this case and his Petrohawk deal fared better than any of his daddy’s Saints teams ever did.