confusedCo-author Chance Decker

Here is what we believe is an unusual situation: A gas unit is formed. The gas well ceases to produce. Another gas well produces from an oil unit, but the lease at issue is not included in the oil unit. Is the lease perpetuated by production from the second gas well?

In Yarbrough v. ELC Energy, LLC The answer is, in Texas, Yes.  Read on for why, and decide for yourself  if this result makes sense. Continue Reading An Unusual Way To Hold an Oil and Gas Lease

perpuitiesWe have a new format. And we’re still gluten free!

Co-author Alexandria Twiss

In BP America v. Laddex, Ltd.  the Texas Supreme Court affirmed that in a lease termination case the trial court cannot limit the jury’s consideration of production in paying quantities to an arbitrary time period. The court also applied the Rule Against Perpetuities.

Production in paying quantities

See this entry for our discussion of the court of appeals’ ruling.

In March 2007 the lessors under the BP lease entered into a top-lease with Laddex covering the same property as the BP lease. Laddex sued, alleging that the BP lease had terminated for failure to produce in paying quantities in 2005 and 2006. A jury found that the BP lease had terminated for failing to produce in paying quantities. BP appealed.

The trial court incorrectly charged the jury on production in paying quantities by limiting the inquiry to a specific 15-month period in which production slowed. The controlling issue was whether the well failed to produce over a reasonable period of time determined by the jury, not a specific period chosen by the court.

The Rule Against Perpetuities

Despite the boredom that may result, you need to know about the Rule. BP argued that the top-lease on which Laddex’s standing depended was void as a perpetuity.

The Rule: “No interest is valid unless it must vest, if at all, within twenty-one years after the death of some life or lives in being at the time of the conveyance.”

The BP bottom-lease was a conveyance of the mineral estate (less portions expressly reserved, such as royalty) as a determinable fee. A it possibility of reverter is the interest left in a grantor after the grant of a fee simple determinable. The possibility of reverter is presently vested at the time the lease is executed.

A top-lease conveyance on expiration of a bottom-lease, without more, generally violates the Rule. However, the court looked to Laddex’s lease. Its primary term commenced on the date that either (1) releases of the BP lease executed by all owners of record are filed in the real property records, or (2) a final judgment terminating the BP lease.

The Laddex lease further stated that is “is intended to and does include and vest in Lessee any and all remainder and reversionary interest and after-acquired title of Lessor in the Leased Premises upon expiration of any prior oil, gas or mineral lease . . . .” The Court concluded that a plausible interpretation of this language was that the Laddex lease is a present “partial alienation” of the lessors’ possibility of reverter under the BP lease, to the extent that what Laddex has acquired “is capable of ripening into a fee simple determinable interest upon expiration of the [BP] lease.” BP’s interpretation was also plausible, but where an instrument is equally open to two constructions, the one will be accepted which renders it valid rather than void.

I denied my heritage by failing to feature a Mardi Gras song on Mardi Gras day. I’ll make up for it with one you’ve heard and one, maybe not.

work-on-wellShould the sufficiency of reworking operations under the cessation-of-production clause of an oil and gas lease be limited to the producing well?  Crystal River Oil and Gas, LLC et al v. Patton was a suit to terminate an oil and gas lease due to cessation of production. The case addressed this question, which you would think had been considered in all the years of lease termination disputes in Texas.

The clause at issue was pretty “standard”:

If, … after discovery of oil, or gas the production thereof should cease from any cause, this lease shall not terminate if Lessee commences additional drilling or re-working operations within sixty (60) days thereafter … .”

The well produced 2,000 barrels of saltwater for each barrel of oil. The saltwater disposal well servicing the producing well became inoperable in September 2011 and was repaired in late October. The jury was asked whether the defendants failed to commence drilling or reworking operations on the producing well. The lessee complained that the question should have allowed the jury to consider work performed on the disposal well. The court agreed.

Lawyers: Pay attention to the Texas Pattern Jury Charge at PJC 303.16. Others: You need not go to that trouble.

The lease didn’t define “reworking operations”.  Lessor Patton contended that reading was required by the habendum clause.

Courts in Texas have used this definition for the term:

“… any and all actual acts, work or operations in which an ordinarily competent operator under the same or similar circumstances, when engaged in a good faith effort to cause a well or wells to produce oil or gas in paying quantities.”

Williams and Meyers (see §618.1) cites the difficulty in defining the term “because of the many ancillary activities that are required in order to operate an oil and gas well” and concludes that whether any particular operation falls under the definition of “reworking operations” depends upon the facts peculiar to that operation.

Prohibiting the jury from considering operations on the salt water disposal well was reversible error. The result will be a do-over at the trial court with a more expansive jury question.

I know you know this, but to appreciate Chuck Berry you have to listen to his songs as if it is 1956: Something you never heard before. RIP.

Co-author Brooke Sizer

Prevails over what, you ask? In Gladney v. Anglo-Dutch Energy, LLC, a conditional allowable from the Office of Conservation didn’t supersede lease royalty obligations.

How did we get here?

Anglo-Dutch completed a gas well on the Gladneys’ lease and then filed a pre-application notice for a compulsory drilling and production unit and applied for a conditional allowable. On May 17, 2012, the application was granted:

All monies generated from the date of first production, the disbursement of which is contingent upon the outcome of the current proceedings before the Office of Conservation for the Frio Zone will be disbursed based upon results of those proceedings.

The next day Anglo-Dutch began sales of production from the well and later submitted a formal unit application. Order No. 124-Y established the unit, effective on and after October 30, 2012.

Perhaps to the surprise of Anglo Dutch, but certainly to its chagrin, the Gladneys demanded payment of the full one-fifth royalty for production from the well prior to October 30th, rather than settle for their share of production on a unit basis.

Anglo-Dutch refused, relying on the conditional allowable which, it said, superseded its lease obligations.

The trial court ruled for Anglo-Dutch, holding that the “allowable covers the royalty payments” because the allowable dated back to first production. The court found no provision in the lease which would require that the Gladneys be paid more than that provided by the commissioner under the allowable and the unitization order.

Reversal from the court of appeal

The court of appeal reversed. “The Mineral Lease … clearly provided Plaintiffs were to get lease-basis royalties on all production from the well and that lease governed the parties’ relationship prior to the unitization order, which was not effective until October 30, 2012.”

Under the Order, the effective date of the unit was October 30, 2012, not the first date of production. The Gladneys were entitled to a full one-fifth royalty from first production until the effective date of the Commission’s Order.

The Gladneys argued, and the court agreed, that the Office of Conservation can’t impede private contract rights. According to an affidavit from a long-time Office of Conservation representative, the conditional allowable was not meant to abridge privately negotiated contract rights. That is consistent with settled Louisiana jurisprudence that meddling in private contracts is beyond the Office of Conservation’s authority.

The court helps those who help themselves

 The court was unpersuaded by Anglo-Dutch’s plea that it had no choice other than to pay royalty on a unit basis because otherwise it would have had to pay double royalties. Anglo-Dutch could have amended its lease obligations through a royalty escrow agreement. The Gladneys noted that they suggested this alternative and it was rejected, and that such an arrangement is a common practice in these situations. The court also rejected the argument that the Gladneys were improperly attacking the Commission’s actions.

Anglo-Dutch should have listened to Alabama Shakes.

flea flickerWestport Oil & Gas Company, L.P. v. Mecom et al. presented this questionWas the lease royalty based on a gas purchase agreement formula or on the royalty clauses’s market value at the well provision?

Spoiler alert: Invoking the seminal Texas Supreme Court decision in Texas Oil and Gas Corporation v. Vela, the court went with market value at the well.

Dueling paragraphs

Under Paragraph 3, the royalty clause, gas royalty was 42 percent (not a typo!) of the “market value at the well … “.

Paragraph 17: “Notwithstanding any other provision of this lease to the contrary … a contract for the sale of gas … shall provide for the sale price computed on the average of the highest price paid by three separate Intrastate Purchasers of gas of like quality and quantity in [RRC] District 4 …”.

The court instructed the jury to compute the gas royalty’s market value based on Paragraph 17. The jury found that Kerr McGee failed to pay those royalties and awarded millions in damages and attorney fees.

The Court’s analysis

Mecom argued the significance of “Notwithstanding any other provision” language. Ignoring Paragraph 17, requiring that the three highest prices become the formula to calculate the market value, renders the paragraph meaningless.

Kerr McGee argued that the Paragraph 17 formula pertained only to future gas purchase agreements and did not alter the commonly accepted meaning of “market value at the well” as stated in Paragraph 3.

The court concluded that the royalty provision is not “contrary” to the gas purchase agreement provision and did not elevate Paragraph 17’s price mandate over Paragraph 3’s market value provision. Paragraph 3 defined the royalty owed and Paragraph 17 set a minimum contract price for future gas purchase agreements. Nothing more.

Remembering Vela

In that case the working interest owners sold gas at a price fixed by a gas sales contract. The market value of gas at the wellhead rose to be far in excess of the gas contract price.  The lease specified the royalty would be “1/8th of the market value … ”. The royalty owed was determined from the royalty provision, which was wholly independent of the gas contract. The court declined to conflate the gas contract price with the market value requirement. Victory for the royalty owner.

… and Yzaguirre

Bastard child of Vela (if you are a royalty owner). This time the market value measure worked for the lessee. The gas purchase price was far in excess of the market value.

What did we learn?

  • The lease dated to 1974. As with Godzilla, leaky shower pans, and a flea flicker in the fourth quarter, dangerous situations can lie dormant for a long time, bringing misery when the victim least expects it.
  • Despite the lessors’ best efforts to protect themselves, the case turned on one short phrase in a comprehensive, three-page royalty clause.
  • “Notwithstanding anything to the contrary … ” is a favored device for scriveners. Make sure it addresses that which you are trying to protect. What if Paragraph 17 had addressed the market value clause directly?

Merry Christmas.

pancake 3North Shore Energy v. Harkins interpreted an Option Agreement between landowners and a producer over a 400 acre tract. In football they would say the Texas Supreme Court pancaked the plaintiff. In the law, some would call it business as usual.

What the court really did?

A contract interpretation case might have little interest to most readers, what with the “doctrine of last antecedent” and such. The significance is that the court, as it has the power to do, reversed and rendered, substituting its interpretation of a contract in place of two lower courts and a jury verdict awarding the producer $709,000 in actual damages, $1.148 million in punitives, and $400,000 in legal fees.

The heart of the dispute was whether a certain 400 acres was included in the Option.  The trial court construed the contract in favor of the producer. There was a jury trial on the producer’s tortious interference and breach of contact claims. The court of appeal sent the case back to the trial court, holding that the contract was ambiguous and thus, interpretation of the description was a fact issue. The Supreme Court held that the description was not ambiguous and interpreted the contract in favor of the defendant landowners.

The facts 

The agreement described a 1,210 acre tract out of a 1,673 acre tract described in an oil and gas lease with Hammon (sic). So far, so good.  The oil and gas lease described 1,273 acres out of the 1,673, SAVE AND EXCEPT a 400 acre tract.

North Shore exercised the option on 169 acres, which happened to contain a portion of the 400 acres.  North Shore drilled its well on the Hammon tract. Not good.

Along comes Dynamic, who, concluding that North Shore didn’t have the right to lease the 400 acres, took a lease from the family. North Shore sued everybody to quiet title to the Hammon lease tract and to reform the Option Agreement.

The court concluded that the description of land in the Option Agreement did not include the 400 acres.

How the court interprets a contract

The high court considered the contract in light of the circumstances surrounding its execution to determine whether it was ambiguous. North Shore paid $144,000 for 2,886 acres, which is $50 per acre; thus, they concluded that North Shore only optioned 1,210 acres.  This would exclude the 400.

The Option was a legally enforceable selection agreement, but it didn’t give North Shore the option to choose any 1,210 acres out of the 1,673.

The court considered the doctrine of last antecedent (English majors, see page 8 for more). The court then considered the word “being”.  The two “beings” in the description were a correlative pair that refer to the same object – the 1,210 acres.  (See page 7) The court then looked at “and” as a conjunction. The court concluded that the family and Dynamic’s interpretation was the only reasonable one.  The Option referred specifically to the lease, which explicitly excluded the 400 acres. Thus, the plain language of the Option specifically excluded the 400 acres. With that, the damages and attorney fees went away.

Leonard Cohen RIP. IMO his writing was better than his singing, so we have a cover of a wonderful song.

unhappy partyLongoria v. ExxonMobil is like throwing a big party but failing to invite all the right guests.

The Longorias – 59 of them – sued producer-defendants over ownership of 9,200 acres in Brooks County, Texas, acquired in the 1800’s. Plaintiffs claimed their ownership was not recognized in subsequent conveyances and judgments and sought an accounting, damages for conversion of their share of production, to quiet title, and to declare their ownership in the mineral estate.

Trouble for the Longorias

Plaintiffs identified 82 absent interest owners as “Necessary, Nominal Parties” – let’s call them the “uninvited” – but did not join them as defendants. Facing motions to abate and to dismiss, Longoria claimed the uninviteds were not necessary because there was no claim against them. But their pleadings made claims on their interests. The court denied that argument.

Alternatives to joinder and service

Longoria offered to pay the unserved interest owners amounts equal to the royalty paid by the producers for as long as production continued.  Like a party favor for not even being invited. The court dismissed that rationale. If the plaintiffs won the suit the producers’ interests would be diminished. The “uninvited” wouldn’t be bound by the judgment, and could continue to look to the producers for payment of 100% of their royalty.

How long is long enough?

Longoria argued that they served 57 of 64 absent owners (producers argued it was fewer) and weren’t allowed sufficient time to locate and serve the others.  Observing that they had been given nine months to accomplish this task, the court concluded that the Longorias, having made half-hearted efforts at service, were not diligent in pursuing the unserved interest owners.

To understand this result, you need to know that this dispute is the progeny of a suit originally filed in 2004. In a 2008 opinion this same court dismissed that suit on the more or less same grounds as this one, but without prejudice, giving the Longorias another chance to assemble the proper guest list.  Looks like the court finally invoked a judicial curfew, sending everybody home.

Finally, Longoria asked the court to allow substituted service on the unserved defendants.  The denied the motion. It was late and was defective because it was not supported by an affidavit. Even new affidavits filed with a motion for new trial were insufficient because they stated conclusions with no supporting facts.

The takeaways

  • A suit is likely to be dismissed if all parties whose interests could be affected by a judgment are not before the court.
  • Left unsaid in the opinion is that if a party is deliberate in refusing to do what the court orders, the court’s patience will eventually run out, with unpleasant results. In this case, 12 years was enough.

A musical interlude, dedicated to the Longorias’ empty feeling as the producer-defendants and the court of appeal leave the party, hand in hand.

terminatorCo-author Trevor Lawhorn ∗

Escondido and Justapor. Next up on Tiny Desk Concert? Good guess, but no. They are the parties in Escondido v. Justapor, a Texas case presenting the perils of lease termination clauses and vaguely-drawn contracts.

The agreements

Justapor as lessor and Escondido as lessee entered into an oil and gas lease in 2008 on the 803-acre Justapor Ranch in Webb County. Among other provisions,

  • Escondido must pay royalties within 60 days.
  • Annual “true-up” of royalty underpayments.
  • Termination if Escondido doesn’t pay the correct royalty.

In 2011, the parties entered into a separate agreement under which Escondido would convey certain interests it acquired in the Ranch to an entity designated by Justapor.

The lawsuit

Justapor sued in 2013, alleging intentional failure to make up underpayments in 2012 and 2013, breach of contract, bad-faith trespass, trespass to try title, and declaratory judgment on lease termination and the parties’ rights relating to a 42-acre “vacancy tract” Escondido was to convey per the 2011 agreement.

Everybody moved for summary judgment on lease and vacancy tract issues. The (home town) trial court granted a final summary judgment for Justapor and denied Escondido’s cross-motion. Escondido appealed.

The court of appeals speaks                                         

  • The lease did not terminate due to Escondido’s breach of the true-up provision. The court parsed the lengthy and complicated termination clause and said it could not be applied without rendering the true-up provision superfluous or giving Escondido conflicting deadlines to make payments.
  • Judgment rendered for Escondido on Justapor’s remaining claims.
  • Because the trial court said the lease terminated in 2012, Justapor’s claim for breach of the true-up provision in 2013 was never addressed.  That claim was remanded so that the trial court could address a typo and determine if Escondido breached the true-up provision in 2013.
  • Judgment on the vacancy tract reversed. Justapor never designated an entity for Escondido to convey interests to. Justapor, therefore, could not establish a breach of contract claim.

Lawyers, pay attention

Escondido waived its defenses to Justapor’s breach of contract claim by failing to expressly present the defenses in its summary judgment response. A “mere reference” to facts supporting affirmative defenses was not enough. Summary judgment for Justapor affirmed for Escondido’s breach of the lease.

Takeaways

  • Lessees: Faced with a termination clause? Don’t agree to this Sword of Damocles! At best, it produces sleepless nights. At worst, it could mean an ugly end to your investment.
  • Drafters: Avoid using confusing language that leads to an unanticipated result.
  • Plaintiffs: Make sure you have performed your own obligations before seeking specific performance.
  • Defendants: Never make Her Honor have to guess about your defenses.

∗ Trevor is a 2-L at SMU’s Dedman School of Law, LSU undergrad, clerking at Gray Reed for the summer.

The New Orleans version of the gospel standard is really two halves of one song: The first half is the dirge, wherein the departed is brought to the final resting place; the second half is the march, the celebration by those left behind. Don’t give up on this one too soon.  Whatever it is you need to get back to can wait.

mr. cleanBehold Mr. Clean. Even he can’t remove a pesky stain as skillfully as the landman who framed the conversation in a way that washed out a lessee. See Anadarko Petroleum Corporation v. TRO-X, LP

Did the lessee retain any interest in the mineral estate after its sublessee and the lessors filed a release of the leases and, unbeknownst to the lessee, executed new leases  In the end, the new leases weren’t governed by anti-washout provisions. The lessee was washed out.

First, the background

Five leases in Ward County, Texas, were executed in 2007. An offset well obligation was triggered by the completion of a producing off-lease well. If the lessee failed to timely commence operations after demand, the lessee would surrender a portion of the lease.

Lessee TRO-X executed a sublease and a Participation Agreement with Anadarko, reserving a back-in that would extend to renewals, extensions or top leases taken within one year of termination of the underlying leases.

In 2008 a neighboring well was completed (by Anadarko, of all people) that arguably triggered the offset provision. Anadarko the sublessee failed to drill an offset well. Two years later the lessors asserted their right to terminate the lease and demanded a release. Anadarko concluded that the demand automatically vested the mineral interests back to the lessors.

In 2011, Anadarko and the lessors signed new leases. The release of the old leases was recorded 13 days after recordation of the 2011 leases. The trial court found that the 2011 leases were top leases and TRO-X was entitled to its back-in.

The court of appeals thought otherwise. Because of the 13-day delay between recordation of the new leases and the release, TRO-X needed to demonstrate that the lessors intended for the new leases to function temporarily as top leases until the transaction was fully consummated (by the release). The court believed that the separate release was an ancillary formality to the new leases.

What was so special about the emails?

The lessors representative assumed the new lease would be an extension of the 2007 leases. The Anadarko landman made it clear that they were not requesting an extension of the 2007 leases, but that they considered the 2011 leases as new leases. In the ensuing emails the lessor never disagreed. He probably didn’t care. He was focused on the bonus, term and a continuous drilling obligation.

My kingdom for a scintilla

There was no evidence suggesting the lessors’ actual intent. TRO-X had the burden of raising more than a scintilla of evidence to support its claim.  A jury may not reasonably infer an ultimate fact on “circumstantial evidence which could give rise to any number of inferences, none more probable than another.” You would assume the lessors’ representative was deposed and the result was not helpful to TRO-X.

The result hinged on what the lessors intended when they signed the 2011 leases. The mere execution and recording of a release after execution of the new leases, without more, was not legally sufficient evidence that the lessors intended for the leases to function as top leases until the release was executed and recorded.

 Our musical interlude considers TRO-X’s likely take on what happened to its back-in.

ceasarApparently unsatisfied with its analysis in Chesapeake Exploration v. Hyder, the Texas Supreme Court revisited its original opinion on an overriding royalty clause. The Hyders remain the winners. In effect, the court replaced its reliance on earlier decisions interpreting royalty clauses with its own analysis (which looks a lot like the original).

The Basics

Let’s start with the rules:

  • An override is free of production costs but bears its share of post-production costs.
  • The parties to a contract are free to agree otherwise.
  • A royalty paid on the market value of oil at the well bears post-production costs.  That value is the commercial value less processing and transportation expenses that must be paid before the gas reaches the commercial market.
  • A royalty based on the price a lessee actually receives for gas (a “proceeds lease”) does not bear post-production costs.  The price-received basis is sufficient in itself to excuse charges to lessors of post-production costs.

The analysis

The override at issue is: “cost-free (except only its portion of production taxes) … of five percent … of gross production obtained …”.

The exception for production taxes (which are post-production expenses) cuts against Chesapeake.  It would make no sense to say that the royalty is free of production costs except for post-production taxes (no dogs, except for cats, opined Justice Hecht).

The court doesn’t agree with Hyder that cost-free cannot refer to production costs.  Drafters frequently specify that an override does not bear production costs even though it is already free of costs because it is a royalty interest. I call it the “belt and suspenders” school of document drafting.

Chesapeake argued that because the override is paid “on gross production” the reference is to production at the wellhead, making the royalty based on the market value of production at the wellhead, which bears post-production costs.  The court concluded that gross production is a reference to volume only. Specifying that the volume is determined at the wellhead says nothing about result:  “Cost-free” includes post-production costs.

The dissent

Four justices dissented, essentially seeing the same language as did the majority and disagreeing on just about every point. A highlight is their analysis of so-called production taxes. They are really post-production costs, according to the majority.

 The dissent thinks not everyone understands that distinction, and parties can allocate taxes differently than other post-production costs.

The dissent believes a statute does not turn a production cost into a post-production cost.  It simply creates a statutory exception to the common law default rule that an override is free of production costs. Second, the pro rata nature of production taxes bolsters the reading that cost-free does not refer to post-production costs.  The dissent believes that “cost free” is indicated to emphasize the default rule, clarifying that Hyder was still obligated to pay its share of production taxes.

Takeaways

  • Some operators, Chesapeake chief among them, have been condemned for gangsterism in their treatment of lessors. Think Imperator Ceaser ravishing the Roman hinterlands. Will Chesapeake go the way of most of the Ceasers? Maybe, but losing five-to-four twice suggests a legitimate legal position this time.
  • Don’t look for a policy you an count on in this case or in Heritage, other than the court will read the lease and interpret the text.

Our musical interlude – dedicated to the dissenters.