Purchase and Sale Agreements

jackie robinsonMy blogging sensei Cordell Parvin says the title should always inform the reader of the content. Mea culpa on this one; I couldn’t resist the alliterations.

Some time back I reported on Carlton Energy Group et al v. Phillips et al.  See that entry for the facts and a Texas Supreme Court opinion. In this new opinion from the court of appeal, the trial court was vindicated and the rest of us learned more about determining fair market value and lost profits.

A brief history

The trial court awarded Carlton $31.16 million in actual damages after finding that Phillips and EurEnergy tortuously interfered with Carlton’s contract with CBM. The court of appeal reversed and rendered judgment for $66.5 million in actual damages. The Supreme Court suggested a remittitur to the $31.1 million, which Carlton accepted.

In this appeal Phillips reiterated without success that the evidence was factually insufficient and asked for remand to the trial court for a do-over. Lawyers: See the inside baseball analysis of legally and factually sufficient evidence.

Arriving at fair market value

Carlton’s damages focused on the fair market value of Carlton’s interest in the Bulgarian gas exploration project: What would a willing buyer pay a willing seller, neither acting under any compulsion?

FMV is generally determined by:

  • comparable market sales,
  • replacement costs less depreciation, or
  • capitalizing net income – that is, profits.

And lost profits 

The lost profits were not themselves sought as damages, but were used to determine the FMV of the project. The court had this to say about lost profits:

  • Profits can be recovered only when the amount is proved with reasonable certainty.
  • The reasonable certainty requirement is intended to be flexible enough to accommodate the myriad circumstances in which claims for lost profits arise.
  • It is impossible to announce with exact certainty any rule measuring profits, the loss for which the recovery may be had.
  • What constitutes reasonably certain evidence of lost profits is a fact-intensive determination.
  • At a minimum, opinions or estimates of lost profits must be based on objective facts, figures or data from which the amount of lost profits can be ascertained.
  • Uncertainty as to the fact of legal damages is fatal to recovery, but uncertainty as to the amount will not defeat recovery.

The damages were in great part determined by extrapolating from the Carlton/Philips agreement to the total value of the project. That the agreement was never consummated did not deprive it of evidentiary value. Having made an agreement for certain price, which determined the value, Phillips was pretty much stuck with that valuation.

Trial strategy and the suicide squeeze

An earlier post compared a defendant’s election not to offer his own damage evidence to the suicide squeeze. In this one – unlike Jackie Robinson – the defendant was out at the plate. Phillips presented no FMV evidence of his own, choosing rather to attack Carlton’s experts.

Gearing up, musically, for the World Series.

While we’re at it, … go ahead and squander just a teeny-bit more time and then back to work.

stratigraphic formation

Co-author Brooke Sizer

How many of your mineral conveyances are described like this:

… all of Sellers’ right, title and interest in and to (a) the oil, gas and other minerals in, to and under the lands … ONLY INSOFAR as such oil, gas and other minerals are located below that depth which is the stratigraphic equivalent of the base of the Cotton Valley formation and the top of the Louark Group defined as correlative to a depth of 10,765′ in the Winchester Samuels 23 # 1 well … and correlative to a depth of 9,298′ in the Tenneco Baker # 1 well …

The dispute

BRP’s predecessor, IP, sold mineral rights in 13,000 acres in DeSoto and Bienville Parishes to Chesapeake with just that description.  When BRP later went to sell more, Chesapeake claimed that the agreement conveyed rights to the Bossier Shale (lying above the Louark Group), as well as the Haynesville. BRP countered that only rights in the Haynesville Shale and lower depths were sold, thus BRP retained all interests above the top of the Louark Group. BRP LLC (Delaware) v. MC Louisiana Minerals LLC, et al. ensued.

The negotiations

The trial court could not ascertain the common intention of the parties in the IP assignment from the words of the assignment itself. So the court considered parol evidence. On one hand, the parties only talked about rights to the Haynesville Shale, and BRP believed that only the Haynesville was below the Cotton Valley formation. On the other, email from Chesapeake referenced its intent to buy all rights below the Cotton Valley.

Big fact:  No geologist was consulted about the description.

A formation is not a monument 

BRP argued that the rules governing surface limitations on servitudes apply to dividing mineral servitudes by depth. In determining the location of a boundary on the land the most important factor is natural monuments.  BRP urged that the “base of the Cotton Valley Formation” and the “top of the Louark Group” are natural monuments. That argument was unsuccessful.

Experts testified that subsurface formations do not have the permanence of natural monuments on the surface: “The location of formations and groups are subject to disagreement among geologists, and the general thought about their location can vary over time…., for this reason, stratigraphic markers, such as the well depths used in this case, are the more commonly used in the oil and gas industry.”

BRP’s problem was that the base of the Cotton Valley and the top of the Louark Group are two different boundaries and are separated by the 500 to 600 foot thick Bossier Shale.

The result

The trial court judgment in favor of Chesapeake was affirmed.

  • The stratigraphic markers represented by well depths were sufficient for designating the minerals conveyed. The depth limitation language was self-defining.
  • IP had been in a position to complete the due diligence necessary to protect its interests.

What does this case mean to you? 

  • If you talk geology, make sure your geologist is on the team.
  • IP’s dealmakers didn’t understand the geology of the formations.
  • Good try BRP, but as successor you were stuck with IP’s description, and their lack of knowledge.

The (almost) perfect musical interlude

Les was overheard last week crooning this mournful tune to his Tiger fanbase. Was it too soon?

Scriveners, when you add those “Other Provisions” in Article XVI of your model from JOA’s, are you sure that the document remains internally consistent, that no “Other Provision” conflicts with the form?

… Are you mindful of which of two related contracts will govern if there is a conflict in provisions? Did you choose the correct one?

Purchasers under a Purchase and Sale Agreement, do you fully understand the effect of the prevailing-contract provision in the underlying agreements?

In XH LLC v. Cabot Oil & Gas Corp., a PSA and a joint operating agreement between the parties’ predecessors were executed at the same time, for the same purpose, and in the course of the same transaction. One can tell from the language quoted by the court that the JOA was an AAPL Model Form 610. The question was whether Cabot’s acquisition of an overriding royalty interest was governed by the AMI provisions in the JOA.

Under the PSA, any lease subsequently acquired by either party within any of five separately-designated AMI’s established in the JOA would be subject to the AMI provision of the JOA.

The JOA’s subsequently-created-interest provision said, in effect:

III.C: Any override (and other interests not important here) created after the date of the agreement would be deemed a Subsequently Created Interest and the burden would be borne by the creating party alone.

JOA Article XVI, Other Provisions, said, in effect:

XVI.A: The JOA will be subject to the terms of the Purchase Agreement. In the event of any conflict between the two, the Purchase Agreement shall prevail.

XVI.G: Subsequently Created Interests shall be subject to this Agreement to the effect that:

If any party were to create an overriding royalty interest (and other interests not important here) after the effective date, such Subsequently Created Interest would be specifically subject to the terms and provisions of the JOA. Three scenarios were described, under all of which the party creating the interest would be responsible for it alone.

XVI.H: Article XVI trumps any other term of the JOA.

XVI.N established the five AMI’s, and gave each non-acquiring party the right to acquire their proportionate interest in any override (and other interests not important here) acquired by any other party.

XH’s View

Article XVI.N obligated Cabot to offer XH the right to purchase a proportionate share of the override. The two provisions were harmonious. The override was not subject to the JOA when Cabot acquired it and as a result was subject to the AMI provisions of the JOA.

Cabot’s View

Jane, you ignorant slut, the Purchase Agreement AMI conflicted with the JOA AMI provision and the Purchase Agreement trumped.

The Result

Cabot wins. The two provisions could not be harmonized. The PSA AMI was limited in scope to subsequently acquired leases, whereas the JOA AMI was broader and included overrides and other interests. Nothing in either agreement said that the JOA was to supplement the PSA. Thus, the override was not governed by the JOA’s AMI.

Musical Analogue

In the case of a song, which should prevail, the original or the cover? Here, you can choose between West Baton Rouge Parish’s own Slim Harpo or The World’s Greatest Rock ‘n Roll Band. The original trumps.

Petro-Hunt L.L.C. vs. Wapiti Energy L.L.C. causes one to think about the effect of a gas imbalances on a producing property acquisition and the importance of so-called “boilerplate” in the purchase agreement. It is also the saga of a bad day at the plate for the seller.

Let’s say I sold you an interest in gas wells which, after closing, turn out to be over-produced. You bought another interest in the same field from mighty Exxon in a more-or-less simultaneous transaction. Those interests were under-produced.

I refuse to settle up as required by our purchase agreement. My response to your suit for damages is that the overproduced and under-produced interests that you acquired wash each other out. Whatever value you lost from me, you will get back from Exxon. By not considering your value received from the other guy, you failed to mitigate. I win – home run! Not so fast, said the court. The under-production you might recover from the Exxon interest has no bearing on your claim against me. My over-production diminished the value of the asset you purchased from me, the purchase price of which was based upon there being no over- or under-production. Strike one.

Next pitch: I say your damages are determined by the value of each over-produced MCF at the time it accrued, set off by the value of each under-produced MCF at the time it accrued. At least a single? Wrong again. The value of your loss was determined on the date of the sale of my interest to you. Strike two.

I’m in a hole at 0 and 2, but maybe I can dribble out an infield hit. Your attorney’s fees award was 75% of your damage recovery. The court should have reduced the fees, I say.  The Texas Supreme Court recognizes a number of factors that go into an award of attorney’s fees.  The amount of fees must bear some reasonable relationship to the amount in controversy, but that factor alone is not determinative. The mere fact that attorney’s fees meet or exceed the amount of damages does not automatically establish that the fees are unreasonable.  Strike three; the futility is complete. You’re feeling like JustinVerlander and I’m looking like Reggie Jackson.*

The ‘boilerplate” that was important in this decision was the survival of warranties and representations after closing and the further assurances clause. Hunt’s representation that there were no gas production imbalances survived closing. And the parties provided for a post-closing final settlement statement. The amount of the imbalances had not been determined at that time. Wapiti relied on the further assurances provision to require Hunt to honor its representation months later when the imbalance was determined.

*Why Reggie? Mr. October leads all batters in the history of major league baseball in strikeouts.  http://www.youtube.com/watch?v=70I4xRbsT4Q

Maybe you’ve been there.  All signals are “go” for closing on your PSA.  Then the buyer chooses not to complete  the transaction.  What to do? A question your lawyer will think about when asked to enforce a purchase and sale agreement: Does it describe the property well enough to comply with the statute of frauds?  Preston Exploration v. Chesapeake Energy teaches several lessons on this subject:  First, in this case the need for title work before closing did not make the contract unenforceable.  Second, it isn’t always easy to know whether the statute has been complied with (The trial court held for the purchaser who backed out; the appellate court sided with the seller).  Third, related instruments can be read together to determine the intent of the parties.

The statute of frauds requires that a contract for the sale of real property be in writing.  The statute is satisfied when a writing furnishes, within itself or by reference to some other existing writing, the means or data by which the land to be conveyed may be identified with reasonable certainty.

The parties executed a PSA for a $110 million transaction.  The purchaser said it wouldn’t close, asserting that the exhibit describing the leases to be conveyed wasn’t final because title work had to be done.  The lower court said there was no meeting of the minds on what was to be conveyed.  The appellate court saw it another way: The question wasn’t about whether there was a meeting of the minds (a prerequisite to enforcement of any contract).The question  was whether the documents adequately described what was to be conveyed.  The court said they did.   The need for additional title examination meant only that some leases might not be conveyed, but the parties had agreed on the subject matter of the agreement.  The exhibit described the leases by recording information, which satisfied the statute of frauds.

For more than you want to know about the Texas statute of frauds, see a presentation I made on the topic. 2007-Statute of Frauds SBOT