crawfishIn Re Louisiana Crawfish Producers arises out of the collision between two of Louisiana’s favored enterprises: crawfish and hydrocarbons.

Takeaways

There is lots of legalese, of interest primarily to lawyers who practice in federal court. So, we’ll start with a few things to remember:

  • The mudbug, specifically Procambaras charkii, is Louisiana’s official state crustacean.
  • Louisiana is the only state with an official crustacean.
  • The court cited Wikipedia for the first two takeaways.
  • The Wikipedia cite could have been a bit in jest. Federal courts are loath to rely on Wikipedia for anything important to the case because, according to the courts, it is inherently and admittedly unreliable, is written by volunteers from anywhere, and can be changed on a whim anytime.
  • To be serious for a moment, in this dispute the tension between oil and gas operations and other competing and potentially incompatible land uses is displayed. This tension has always existed and is not going away.

The litigation

The crawfisherpersons sued a number of oil and gas companies claiming that dredging activities caused damage to fisheries in the Atchafalaya Basin (Non-natives: Impress your friends by reminding them the emphasis is on the “cha” not the “Atch”). The question was whether the complaints stated a cause of action for a maritime tort. The district court granted summary judgment in favor of Florida Gas Transmission Company and Southern Natural Gas Company, finding no genuine issue of material fact as to whether the defendants’ activities constituted dredging.

Summary judgment affirmed

The Fifth Circuit affirmed the judgment for Florida Gas. The company said all it did was place a pipeline into an existing canal, which is insufficient to support a maritime tort claim . The plaintiffs did not produce any evidence to create an issue of fact. A Corps of Engineers permit application and other circumstantial evidence was not enough to sustain plaintiffs’ burden to create a fact issue that dredging occurred.

Summary judgment reversed

The court reversed as to Southern Natural. A company representative testified in a deposition that they engaged in dredging activities in connection with spoil banks, and the company admitted in responses to requests for admission to using dredging vessels in the construction of a canal.

The problem was with the trial court’s denial of the plaintiffs’ motion to reconsider its original order. To understand why the Fifth Circuit reversed see the analysis of Federal Rule 59(e) addressing newly discovered evidence and who should be suffer when the judge is unaware of a revised scheduling order (spoiler: not a party; the district court should have considered evidence that was timely filed under the revised order). Worrisome for lawyers is why the district court had to be admonished over its refusal to consider the evidence on a motion to reconsider.

And of course, our musical interlude

Empty tomb with three crosses on a hill side.

Co-author Lydia Webb

One of the hottest issues from 2016 was whether an E&P debtor can reject, under section 365 of the Bankruptcy Code, an above-market midstream contract. Given the potential for a “no-win” situation, in all but one case where the issue arose E&P debtors and midstream companies were able to settle, often by entering into new midstream contracts upon mutually agreeable terms that take into account the changed market conditions since the downturn in commodity prices.

However, the bankruptcy judge in Sabine Oil and Gas Corp. held that an E&P debtor could reject its gas gathering agreements because its midstream counter-parties could not establish that their agreements were covenants running with the land under Texas law. The midstream companies appealed to the U. S. District Court for the Southern District of New York, hoping for a better answer. They did not get their wish.

Many were surprised by the opinions, given the billions of dollars invested in necessary midstream infrastructure that was built under the assumption that gathering, processing and transportation agreements would bind the producer’s successors. The Sabine court was unsympathetic, and last month affirmed the bankruptcy court’s rejection orders. The midstream companies’ primary argument was that the dedication language in the agreements were analogous to the conveyance of a royalty interest in minerals “produced and saved”.  Thus, Sabine’s dedication must have conveyed a real property interest. The district court was not impressed, and held that the gathering agreements were mere service contracts, and Texas law did not support a finding that they constituted a conveyance of mineral rights or otherwise burdened the underlying leases.

The debate will continue. Sabine is not the end of the argument that interests created by midstream oil and gas agreements are covenants running with the land that can survive a producer’s bankruptcy. Why?

  • A Texas court has not yet ruled on the issue, although at least one Houston bankruptcy judge has commented that he would love the opportunity to set the record straight for his New York colleagues. Given the complex issues of state law involved in the interpretation of these agreements, there is reason to believe that a Texas judge experienced in Texas property law would rule differently.
  • Energy companies continue to construct creative arguments that these agreements create real property interests that cannot be shed in bankruptcy. Most recently, in the Vanguard Natural Resources Corp. bankruptcy it has been argued that the right to drill and develop acreage assigned under a farmout agreement creates a covenant running with the land that burdens the entirety of the lessee/farmor’s undeveloped acreage (Caveat: This is not a midstream situation).

Stay tuned. Whether these arguments hold water, and in which contexts, is yet to be seen. What is clear is that midstream companies will continue to innovate in their effort to protect agreements in which they have invested millions of dollars, and the producers will respond.

It’s Holy Week, a time for musical interludes, one Jesusy but not churchy, one churchy. See you there.

cavalryAccording to Enterprise Te Products Pipeline Company v. Avila, it is the value of the expropriated property, even if it is as little as 33 cents each to the landowners. This seemingly small case must have had big potential for chaos. Otherwise, why appeal?

Enterprise sought expropriation of a 30-foot wide servitude over the Avilas’ property. The trial court granted a 99-year servitude and found the total value to be $1,060, but awarded each of the 12 landowners who appeared between $150 and $300, despite their collective ownership of slightly more than 1 percent. Each of the many absentee owners was awarded $150. Enterprise appealed, arguing that imposition of a term was erroneous and that the compensation award was contrary to the facts in the record.

Under Louisiana law, a legal servitude can be extinguished only by certain events, such as destruction of the dominant or servient estate, if things necessary for its use have undergone such a change that the servitude can no longer be used, or if it is not used for 10 years or longer. The trial court erred in fixing a term for a legal servitude.

What about those damages?

An award of damages caused by the expropriation should be based upon the value of the property before the contemplated improvement was proposed, without deducting benefits to the owner from the improvement. He must be compensated to the full extent of his loss. La. R. S. 19:9. Enterprise’s expert determined that, based on the highest and best use of this rural property, the value of the 160-acre tract was $1,200 per acre. The servitude covers less than one acre, making the total value of the expropriated property $1,060.

What motivated the trial court?

The trial court was “impressed by the impact that taking such as this would have upon the ancestors of an African-American landowner who acquired the property at a time when ownership by a person of color was rare .” The court of appeal believed that sentiment was “implicit” in the ruling.

The main argument of the landowners (who weren’t represented by counsel) was the fundamental unfairness of the expropriation process – a viewpoint no doubt shared by every expropriation defendant since the beginning of time. The court of appeal also appeared to sympathize. It its words, it was “forced to conclude that the award to the Appellees is manifestly erroneous” and amended the judgment.  The result was that each appellee-landowner received between 33 cents and $5.23.

Questions

  • When is a trial court’s duty to do what she believes is right, rather than rule in strict (or no) conformance with the rule of law?
  • What motivated the trial court? Sympathy, … a sense of justice and fairness, or … what?
  • What if there were no appellate court – no cavalry galloping over the hill to save the troops?
  • Why appeal? To communicate a message to future hold-outs?

A musical interlude for the long-suffering landowners.

pipelineWe now know what it takes to establish common carrier pipeline status in Texas.  According to the Texas Supreme Court in Denbury Green Pipeline Texas LLC v. Texas Rice Land Partners Ltd., all that is required is a reasonable probability that the pipeline will, at some point after construction, serve the public by transporting a product for one or more customers who will either retain ownership or sell it to parties other than the carrier. A “reasonable probability” is “more likely than not”.

Summary judgment evidence established a reasonable probability that at some point after construction, Denbury Green’s CO2 pipeline known as the Green Line would serve the public, and thus Denbury Green is a common carrier as a matter of law. This means no jury trial in Jefferson County at which common-carrier status would be the issue.

A long history

In its original opinion first time up the appellate ladder, the court held that “checking the box” on Railroad Commission Form T-4 was insufficient to establish that a pipeline is a common carrier. The record showed only the possibility of future customers, which is not the same as a probability. Plus, there was objective evidence – from Denbury’s own web site – of its intent to use the pipeline solely for its own purposes. After that opinion, the court of appeals found that the facts at the trial court did not establish common carrier status.

This time around, though, Denbury presented evidence necessary to make its case. For example:

  • Testimony that the line was designed to be close to refineries, plants and other facilities that could use the line to transport and store CO2.
  • Transportation agreements with two unaffiliated entities and a sister company acting on behalf of itself and working interest owners unaffiliated with Denbury.

This was “reasonable proof of a future customer”, thereby demonstrating that the line will transport to or for the public for hire and is not limited in its use to the wells, stations, plants and refineries of the owner.

How else can we make it easier?

The Supreme Court removed two court of appeals-imposed hurdles to common-carrier status:

  • The court eliminated the requirement that agreements with third parties be sufficiently substantial to establish common-carrier status as a matter of law. The Supreme Court ruled that the public interest need not be “substantial”. Evidence of a “reasonable probability”, etc. is substantial enough to satisfy the public use requirement.
  • Evidence is no longer limited to pre-construction events or the proponent’s subjective intent or beliefs at the time of its plan to construct the line.  Post-construction contracts are relevant to the analysis.

Left for another day is whether a contract between affiliated entities that may benefit unaffiliated working interest owners is sufficient to establish common carrier status.

A musical interlude.