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Energy & the Law

Treachery of the Untrustworthy Trustee

Posted in Contract Disputes, Title Issues

Co-author Brooke Sizer

J-W Operating Co. v. Olsen is another Louisiana concursus (“It’s not my money, Your Honor; let them fight over it”).

The Trust

In 2006, Fred Houston created the Fred L. Houston Trust and placed into it the Tenneco lease, which had been producing since 1974. Ms. Williams was the trustee. The trust instrument declared the trust “… irrevocable and may not be revoked at any time under any circumstances,” including “any action to modify or negate Settlor’s intended effect of protecting the properties and assets transferred to the Trust.”  This language established it as a spendthrift trust.  Houston was both the income and principal beneficiary. Upon his death, “his interest in the trust shall vest in his estate (his heirs or legatees) free of trust.”

The Treachery

All you need to know about the treachery is that the following transaction was orchestrated by Ms. Williams and she personally benefitted from it:

Noble House offered to buy the trust’s interest in the Tenneco lease. In April, Houston signed, in his personal capacity, an assignment of the royalty interest in the Tenneco lease to Noble House. The assignment made no mention of the trust. That same day Noble House promised to assign to Ms. Williams “50% of the interest purchased as soon as the new division orders are complete.” The assignment to Ms. Williams was executed on August 8. Noble House assigned its remaining interest to its president Olsen a year later. Houston died and his executor notified J-W Operating that the trust, and now the succession, claimed the Tenneco lease.

The Assignment: Really Null or Just Maybe Null?  

Was the assignment to Noble House …

An absolute nullity? A contract is absolutely null when it violates a rule of public order, as when the object of a contract is illicit or immoral. A contract that is absolutely null may not be confirmed.

A relative nullity? A contract is relatively null when it violates a rule intended for the protection of private parties, as when a party lacked capacity or did not give free consent at the time the contract was made. A contract that is only relatively null may be confirmed.

Olsen and Williams argued relative nullity that was cured by subsequent acquisition. Houston might not have had title to the lease at the time of the assignment, but ownership vested in his estate upon his death—curing the relative nullity and conveying after-acquired title.

The executor argued absolute nullity, citing the doctrine of “trust indestructibility.” The assignment violated the core concept of the trust: the beneficiary cannot alienate trust property.

The court agreed with the executor. The Noble House assignment violated a rule of public order, protecting the settlor’s intent as set forth in the trust document. Louisiana has a strong public policy “in effectuating and protecting the settlor’s intent as set forth in the trust document.” The settlor of a trust is limited to modifying the terms of the trust after its creation only to the extent that he expresses in the trust document.

It was clear that Houston intended to protect the properties transferred to the trust, including the Tenneco lease. The Noble House assignment and the assignments to Williams and Olsen were absolute nullities.

Bonus: An Insider’s Look at the Structure of the Deal

More than just a little bit of chanky-chank and a video, here is a rare glimpse of the negotiations between Ms. Williams and Mr. Olsen.

Rumsfeld, Morrison and the Discovery Rule in Texas

Posted in Land Titles, Title Issues

As Donald Rumsfeld teaches, knowledge can be divided into three categories:

  • Known knowns; things that we know that we know;
  • known unknowns; that is to say, we know there are some things we do not know; and
  • unknown unknowns; the ones we don’t know we don’t know.

Another philosopher, Slavoj Zizek, adds a fourth, for parents vis-a-vis the whereabouts of their children after midnight: “The unknown known; that which we intentionally refuse to acknowledge that we know.”

Which category fits the plaintiffs in Tipton v. Brock? You decide, but here is the lesson: If you don’t bother to read your deed, you stand little chance of knowing anything.

In August 1999, Brock and Tipton signed a Farm and Ranch Contract by which Tipton would acquire 519 acres in Montague County. (Lots of Brocks were parties to the contracts and the suit. I refer to them as one for convenience.) All mineral rights were to be retained by Brock Two months later, the parties executed a Warranty Deed transferring the land,

“LESS, SAVE AND EXCEPT all oil gas and other minerals found in … the above-described tract of land heretofore reserved by predecessors.”

In 2009, Brock sued for reformation of the Warranty Deed based on mutual mistake. Tipton asserted the four-year limitations statute and that the discovery rule did not apply. the jury rendered a verdict for Brock, even though testimony at the trial was that some of them didn’t read the deed, and those who did had what appear (to me, anyway) to be lame reasons why they didn’t understand it for what it was.

The Rules

The Supreme Court of Texas has several things to say on this subject:

  • A cause of action accrues and the statute of limitations begins to run when facts come into existence that authorize a claimant to seek a judicial remedy.
  • The discovery rule is an exception, and defers accrual of a cause of action until the claimant knows or, by exercising reasonable diligence, should know of the facts giving rise to the claim.
  • The rule applies when the injury is both inherently undiscoverable and objectively verifiable.
  • The injury is inherently undiscoverable if it is a type of injury that is not generally discoverable by the exercise of reasonable diligence.

Fair or Unfair?

Based on the jury verdict, the plaintiffs had a good case that just wasn’t brought timely. Some would call the limitations defense a “loophole”.  But one doesn’t have to be president of the AAPL to conclude that the sellers didn’t exercise diligence when executing the deed.

 For the Lawyers

Jury question No. 7 asked: “By what date did Plaintiff either know or, in exercise of reasonable diligence, should have discovered the original Warranty Deed did not reserve the mineral interests to Plaintiff?” The jury answered “7-8-08”.

The court ruled that Tipton, loser at trial and appellant, was not obligated to lodge an objection or request to that instruction because “inherently undiscoverable” and “objectively verifiable” are legal issues to be decided by the court and not by a jury. Although the jury could have determined when Brock discovered or should have discovered the cause of their injury and whether they exercised due diligence in discovering their cause of injury, it was up to the court, and not the jury, to resolve the question of whether the discovery rule applied.

Why did they wait so long to sue? The opinion gives some clues, but they should have listened to Van Morrison.

This is Why You Need a Will

Posted in Land Titles, Title Issues

Co-author Brooke Sizer

These people cannot testify

Let’s talk title disputes, especially ones between those with record title and those claiming title by possession:

  • They are complicated (There were 229 defendants in today’s case)
  • They happen when there is a lot of money to fight over ($2.7 MM in today’s case)
  • They involve events that happened a long time ago
  • The witness who can prove your case is probably dead
  • The witness who can prove your opponent’s case is probably dead
  • The witness who can dispute testimony from the witness who is alive is probably dead
  • Its easy to find precedent that supports your side. But your case will not be exactly like that case.  What counts is how the trier of fact – judge or jury – evaluates the credibility of the witnesses and the weight of the evidence. Don’t expect summary judgment.

EOG Resources v. Hopkins was about ownership of gas royalties from 100 acres in Jackson Parish, Louisiana, acquired in 1900 by Emanuel Osborne, a widower, after his remarriage to Organ Ford, a widow. Together they had 25 children from their prior marriages. Being too tired, they had no children together. Organ died in 1927 and Emanuel died in 1933. No succession was filed for either of them.

The Osborne heirs owned an undivided one-half interest. At issue was whether the Ford Heirs, the Osborne heirs, the Clifford Osborne heirs (who not the Osborne heirs), and/or Mr. Hopkins acquired ownership by 10- or 30-year acquisitive prescription.

There were three tracts:

  •  60 acres purchased by Emanuel in 1901—including 40 acres allegedly transferred from Emanuel to his son Amon and the “Lost 20 acres”.
  • The “Fenced Parcel”—20 acres believed to have been purchased by Amos in 1932 at a tax sale. It was transferred to another Osborne heir in 1981 and then purchased by Hopkins in 1995 and 1996. Hopkins testified that he fenced in the entire parcel more than 10 year prior to trial.
  • Clifford’s Farm – 20 acres, acquired by Emmanuel in 1907.

EOG filed a concursus proceeding to determine the ownership of the one-half interest in the mineral rights on the property.

Acquisitive Prescription of 10 years

Requirements: Possession for 10 years in good faith and under just title. A possessor is in good faith when he reasonably believes, in light of objective considerations, that he is owner of the thing he possesses.

Acquisitive Prescription of 30 years

Just title or good faith possession not required. Requirement – no title: possession extends only to that which has been actually possessed. Requirement for possession: continuous, uninterrupted, peaceable, public and unequivocal.

Generally, an owner in indivision cannot acquire by prescription the rights of his co-owners. A well-settled exception is where the possessing co-owner gives notice to the other co-owners that he intends to possess as owner adversely and contrary to the common interest.

Intermission

Speaking of the deceased: Johnny Winter RIP.  At least his “testimony” survives.

The Result

  • The 60 Acres:

Allegedly transferred in 1901 from Emanuel to his son, Amos, and restated in a deed in 1931. It was not possible to show title based on the public records because the records were sporadic and incomplete. The 1931 deed was insufficient to provide notice. The Osborne heirs pointed to other documents to assert the hostile acts needed to support a finding of adverse possession of 30 years. This failed. Several recorded documents referred to the Osborne heirs only, but other recorded instruments such as sales of mineral and timber leases, were executed over many years by both the Osborne heirs and the Ford heirs. The Osborne heirs failed to satisfy their burden of proof of ownership of the 60 acres by 30-year acquisitive prescription, which needed to be open and hostile.

  • The Fenced Parcel

Claimed by the Hopkins family by 10-year acquisitive prescription. Because Mr. Hopkins obtained the property via warranty deeds in 1995 and 1996, good faith was presumed and the Ford heirs had the burden of proving that the Hopkins were in bad faith. Hopkins had the burden of proving continuous, uninterrupted, peaceable, public and unequivocal possession for 10 years.

Neither party was able to carry their burden. Mr. Hopkins testified that he fenced the property shortly after he purchased it; however, the judge discredited his testimony in light of testimony of a forester who did not see a fence in 1999 and a survey that did not show a completed fence in 2000. In 2010 there was a fence around the parcel, but there was no testimony as to when the fence was constructed. Hopkins failed to prove that they possessed a delineated parcel for 10 years prior to trial.

  • Clifford’s Farm

The Clifford Osborne heirs testified that Clifford and his sister Donisha used the 20 acre parcel as a farm. There was testimony against this. The judge found that Clifford Osborne heirs met their burden of proving possession for the 30-year period, but only for the western 10 acres. The judge used an aerial survey to determine what portion of the 20 acres that the Clifford Osborne heirs used for the farm. The Ford heirs counter argued that members of both families used the property encompassing the 20 acres for hunting, fishing, running dogs and other recreational activities.

The evidence convinced the court that members of both families used the property, including the 10 acres awarded to the Clifford Osborne heirs, for purposes commensurate with the nature of the property. Further, even if there had been adequate possession, the Clifford Osborne heirs failed to prove a delineated boundary sufficient to support the award of 10 acres. The totality of the evidence required a finding that the Osborne heirs failed to meet their burden of proving ownership by acquisitive prescription of any portion of the disputed property.

The Non-Binding Agreement – Louisiana Edition

Posted in Contract Disputes, Lease Disputes

Co-author Brooke Sizer

I say, ”Let’s go down to the crab shack for some seafood”.  You say, “I agree, we’ll go to a steakhouse for a big, juicy slab of cow”.  Am I obligated to join you to split a 32 ounce Porterhouse with three sides and a Cabernet with a 94 rating?

No.  In 2008 as the Haynesville Shale was being developed at breakneck speed, companies rushed to lease and landowners banded together in groups in order to obtain the best terms. Landowner Mr. Walsworth joined the “Go Getters”, which retained the assistance of attorney Wedgeworth to represent them in negotiations.

What happened?

July 8 – Chesapeake delivers an “Agreement to Lease” with basic terms of an offer, subject to “ … execution of a mutually agreed upon paid up form of Oil and Gas Lease, in the form … attached …”

July-September – Wedgworth replaces that provision with “Chesapeake’s offer is subject to the execution of a mutually agreed upon paid up form of Oil and Gas Lease.”

September 10 – Wedgeworth forwards a lessor-friendly lease. The terms were essentially the same as terms previously approved by Chesapeake for a lease on behalf of another group Wedgeworth represented.

September 18 – members of the group execute Wedgworth’s revised Agreement to Lease

October 8 – Wedgeworth inquires about a response.

October 17 – Chesapeake withdraws the offer, rejecting the form and citing greatly reduced gas prices and lease values.

October 10 – Plaintiff sues, claiming the Chesapeake repudiated the Agreement to Lease, thereby breaching the contract in bad faith.

The Question

Did the Agreement to Lease and Wedgeworth’s revision constitute a contract between the parties?

No. Upon receiving Chesapeake’s proposal the landowners submitted their own proposal, specifying different terms. This was a counteroffer with material changes.  Chesapeake had two courses of action: (1) accept the offer, manifesting assent, or (2) reject the offer.

There was testimony that Chesapeake communicated approval of the lease form to the landowners before backing out. Chesapeake countered by presenting Wedgeworth’s testimony that at no time did Chesapeake inform him that the lease had been approved. Also, it was Wedgeworth, who rejected Chesapeake’s original lease form and revised the Agreement to state that the form would be negotiated. This meant to the court that there was no acceptance of the Chesapeake offer, which means the offer was rejected.

The result

In Walsworth v. Chesapeake Louisiana, L.P.,  the court said, the executed Agreement to Lease did not result in a binding agreement because the undisputed facts indicate that the parties understood that their Agreement to Lease was tantamount to a letter of intent which contemplated additional negotiations, to wit: finalizing the lease form” The revision changed the Agreement to Lease into an unenforceable contract that Chesapeake was free to remove itself from.

We’re catching up on our Louisiana cases.  Would you like to be leaving or are you glad we’re going back?

 

 

 

Frac(k)ing, Parr v. Aruba, and Minority Oppression

Posted in Hydraulic Fracturing, Litigation

WHAT IS IT, FRACING OR FRACKING?

Having gone back-and-forth over how to spell the process, I’ve figured it out.

Why it is “Fracing”:

  • That’s what the engineers call it, and they’re the ones who do it.
  •  Some law firm blogs stand fast with their friends and agree.
  •  It’s a gerund:  A noun formed from a verb by adding “-ing”.  So says Merriam-Webster.  That makes ”fracing” correct.  (Accolades to my linguistically enabled wife for that explanation).
  •  The Utopians have stolen a word that doesn’t belong to them about a process they don’t understand. In adding the “k”, they imply a certain lasciviousness to the process and to the industry.

 Why it is “Fracking”:

  • Because that’s what it’s called in the popular press.
  • Look it up in Merriam-Webster: it’s “fracking”.  Otherwise, ”Did you intend to look for ferrocene … Fresno?” No, I guess I intended to look for fracking.
  •  Other firms, whose lawyers matriculated to institutions that charge far higher tuition than mine, have given in, and refer to it as ”fracking”.
  •  Bryan Garner, in his excellent legal writing blog LawProse, explains when referring to word usage that some words start out as substandard English until, over a long period of time, they become accepted by more and more commentators, to the point where the words become standard English. Perhaps that’s where we are with our word of the day.
  • My autocorrect feature in Word puts that red swirly line under “fracing” but not “fracking”.
  • Those not literate in oil and gas lingo might pronounce it like “facing” or “bracing”.

The “k’s” have it, 6 to 4.  Maybe I’ll just call it what it is: “hydraulic fracturing”.

A JUDGMENT IN PARR V. ARUBA 

In the “first fracking verdict ever”, or whatever you choose to call the result, the trial court denied Aruba’s post-judgment motions and confirmed the jury verdict in favor of the plaintiffs. That includes the $2.65 million in damages for personal injuries. Thus, the answer to the question posed in the last post is a qualified “yes”. Can you imagine Aruba’s thoughts about the court of appeals?

OPPRESSING THE OPPRESSED MINORITY NO LONGER

In a development not about Republicans’ imagined campaign of voter disenfranchisement, the Texas Supreme Court issued a long-awaited ruling involving allegations of oppression of a minority owner of a Texas corporation.  Here is Gray Reed’s takeaway, prepared by Mark Wigder.  Generally speaking, it’s fair to say the “majority” won.  

Are Personal Injury Damages Available in a Nuisance Case?

Posted in Hydraulic Fracturing, Lease Disputes

Co-Author Maryann Zaki

As promised, on May 22, today’s post is a study of the personal injury issues raised by the defendants in Parr v. Aruba. You will find a more detailed analysis here.

In this post we raise the question and discuss what the parties believe the answer should be.

The Havner Hurdle

Merrell Dow Pharmaceuticals, Inc. v. Havner established hurdles to a plaintiff’s right to recover for personal injuries in a toxic tort case.  So far the Parrs have cleared enough of them to get a verdict in their favor.  The 11th amended petition disclaimed ”personal injury” damages that would invoke Havner. In response, Aruba argued:

  • Plaintiffs’ alleged “disclaimer” of personal injury damages was ineffective, given the damages that plaintiffs continued to plead.
  • The plaintiffs failed to specifically identify studies that met Havner’s requirements that there be some evidence of causation linking the alleged contamination to their injuries.
Summary Judgment

The court granted partial summary judgment:

  • Plaintiffs take nothing on any personal injury claim that would invoke the proof requirements of Havner.
  • Plaintiffs take nothing on any claim that defendants’ actions caused a disease that occurs genetically and for which a large percentage of the causes are unknown and that plaintiffs’ claims for damages are limited only to symptoms typical of discomfort rather than disease.
  • Plaintiffs’ personal injuries are limited to injuries that are (1) within the common knowledge and experience of a layperson, and (2) the sequence of events is such that a layperson may determine causation without the benefit of expert evidence.

Aruba’s Post-verdict Efforts

After the jury awarded $2.65 million for the Parrs’ personal injuries, Aruba argued that:

  • Plaintiffs’ injuries and damages fell within the general rule that expert testimony is required to prove causation in a toxic exposure case.
  • The damages awarded by the jury did not fit within a very narrow window of available claims to be proven at trial and could not be proven by lay testimony.

Parrs’ Response:

  • The trier of fact is may decide causation in cases of this nature based on (1) their general experience and common sense; (2) when scientific principles, usually proved by expert testimony, establish a traceable chain of causation from the condition back to the event; and (3) when probable causal relationship is shown by expert testimony.
  • Plaintiffs offered expert testimony regarding general causation of their symptoms typical of discomfort rather than disease.
  • Texas law allows expert testimony to augment the causal analysis with evidence of general causation regarding “symptom damages” where specific causation was within the experience and understanding of the jury.
  • Nothing in the court’s orders or Texas law prevented plaintiffs from introducing (1) expert testimony regarding on “event causation”, and (2) expert testimony on “general” causation to augment “specific” causation of symptoms “typical of discomfort rather than disease.”
  • Expert’s testimony about health effects generally caused by VOCs was legally sufficient evidence of general causation because he testified about plaintiffs’ complaints and their causal relation to the chemicals and/or particulates from Aruba’s well sites.
  • Havner causation requirements do not apply because plaintiffs sought damages for symptoms typical of discomfort rather than disease.
  • There was expert testimony on general causation that established a sequence of events from which the trier of fact properly inferred that Aruba’s activities were a “substantial factor in bringing about the damages, and without which condition such damages would not have occurred.” The Parrs testified that they never experienced the symptoms and nuisance conditions prior to Aruba’s operations.

Aruba’s Reply

  • No Texas cases recognize the standard the Parrs attempted to create to prove scientific causation.
More later this week on what the court did after the verdict … and an answer to the question.

Are Oil and Gas Producers Protecting the Environment?

Posted in Energy Policy, Environmental Policy

In their search for Utopia, some opponents of oil and gas drilling ignore innovation … What’s harmful now will forever be that way.

The Question

That isn’t true, but it raises a question for producers: What are you doing to reduce the negative effects of your activities on the communities where you operate?

The Answers

Here are examples of the industry investing considerable time, money and effort to reduce its impact on the environment:

  • In Colorado, Anadarko is concentrating hydraulic fracturing operations in “Stim Centers”, locating those operations in a single location, thereby reducing truck traffic, and time and money otherwise spent on setting up.
  • and using pipelines instead of trucks to carry frac water.
  • Noble Energy is using “integrated development plans” to centralize facilities, reducing truck traffic and costs.
  • Marcellus shale producers are recycling 90% of their flowback water, according to Ben Seifer of Energy in Depth.
  • Statoil is reducing flaring and air emissions in the Bakken shale by testing a mobile system that converts associated gas into CNG at the well site.  The gas is then used on the well as a power source.
  • According to the Environmental Defense Fund (not the ”Utopians” referred to above) there are cost-effective options to control methane, such as lower-emitting valves and other mechanical improvements.
  • Patrick Kiger in his National Geographic blog tells a similar story. I include his entry for the comments from the “Utopians”.
  • State regulators are focusing on leaking methane.

There is no doubt that many of these efforts are a response to the looming presence of regulators and regulations. That is to be expected. Industries tend to believe they are doing “enough” to satisfy their critics and would prefer to be left alone to run their business. That is not going to happen. Regulators exist to regulate, opponents live to oppose, and no industry can ever do enough to satisfy those two constituencies, even if it means more costs and burdens.

Why Does it Matter?

Why do I speak of this? “The wages of sin …” Oops, wrong venue. “The downside of rapacious destruction of Mother Earth … “ Too shrill, and generally not even true. Here you go: “Powerful forces are against you and if you don’t meet them somewhere in the middle you could be squeezed out of the process.  The result will be excessive and unreasonable regulation.”

What Would Nanook Do?

The risks of pollution could not be portrayed more forcefully than in this musical interlude.

Perils of “Other Provisions” in the Model Form JOA

Posted in Operating Agreements, Purchase and Sale Agreements

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.

Operator Wins JOA Fight

Posted in Contract Disputes, Operating Agreements

MDU Barnett Ltd. P’ship v. Chesapeake Exploration Ltd. P’ship is at least three things:

  • The culmination of an unhappy relationship between an operator and non-operators.
  • What happens when joint owners’ interests are not aligned.
  • Predictable, given Texas law and the relationship of parties under the model form JOA.

In 2005 Chesapeake and Conglomerate Gas entered into an Exploration and Development Agreement involving Barnett Shale properties. A separate 1982 AAPL Model Form 610 Operating Agreement governed each exploration and development area.

Chesapeake was designated as the  operator, which gave it exclusive control over leasing, drilling and operations. Under the E&D Agreement, Chesapeake was to provide drilling reports, logs, cores, tests and all information gathered from the wellbore. After termination of the E&D Agreement  – on March 1, 2008 – each separate operating agreement governed.

Conglomerate assigned wellbore interests to Oro in June 2008. Oro then conveyed the interests to the plaintiffs, who bought with the intent to sell. In order to do so, the plaintiffs sought development information and acreage maps, which Chesapeake wouldn’t give.  Plaintiffs sued. The claims and their fate:

Negligence and Negligent Misrepresentation - Dismissed 

Plaintiffs claimed that Chesapeake negligently deprived them of well information and financial payments. If the injury flowed from the economic loss to the subject of the contract itself, rather than as a result of the breach of a duty created by law (a tort, for example), the action sounds in contract alone. Here, the alleged economic damages arose from the defendant’s failure to perform under the contract.  This is the economic loss rule in action.

There were allegations of misrepresentation of the viability of the E&D agreement. The complaint stated that they justifiably relied on the representations, which led to damages. This conclusory allegation was insufficient to support a claim for negligent representation.

Fraud – Dismissed

The claim was that Chesapeake fraudulently provided inaccurate or incomplete data wellbore data. The plaintiffs failed to allege fraudulent intent, and the pleading did not meet the heightened pleading requirement in federal court for fraud. The plaintiffs must do more than state that the statements were knowingly false when made or made with reckless disregard of the truth. The allegation in the complaint was not enough to show that the discrepancy was intentional or reckless.

Breach of Fiduciary Duties - Dismissed

  • Trustee/agency relationship: Texas law does not recognize trustee type relationships in operating agreements.
  • Joint venture: An operating agreement giving mutual right of control to both parties may create a joint venture. However, these agreements gave sole operating rights to Chesapeake.
  • Informal fiduciary relationship: Such a claim requires a preexisting relationship between the parties. There was none in this case.

Equitable Accounting - Dismissed

The plaintiffs pled no facts showing that the revenue calculations under the contractual accounting mechanisms were of sufficient complexity to merit equitable relief.

Gross Negligence and Willful Misconduct - Dismissed

This was made, no doubt, to avoid the model form’s exculpatory clause. I’ve reported twice before on the difference between the 1982 and 1989 forms. The exculpatory clause is more favorable to the operator in the 1982 form.

Breach of Contract - The Plaintiff Stays Alive

The assertion was that Chesapeake violated several provisions of the E&D Agreement and the operating agreements, which caused the plaintiffs to suffer out-of-pocket, expectation, and impairment of vendibility damages. The E&D Agreement had terminated by the time MDU bought the properties. The court did not agree with plaintiff’s argument that the operating agreement’s incorporation language preserved the E&D Agreement. The operating agreements incorporated all of the E&D Agreement, including its March 1, 2008 termination date. Under the operating agreements, Chesapeake owed no duty to disclose development plans and acreage maps.

Unlike General Custer, the plaintiffs were not totally poured out. They stated a plausible claim for breach of contract relating to delayed look-back elections, erroneous JIBs, underpayments of proceeds, and improper production charges. These claims survived. Damages would be limited to expectancy damages in the form of financial underpayments of monies owed and overcharges of production costs.

Special thanks to Alexandria Moore, Baylor Law 2L and Gray Reed summer intern.

Our musical interlude is about the Barnett Shale, kind of.

What’s Up at the Department of Energy?

Posted in Energy Policy

Who is that man on the right?

 

 

 

 

 

a.  Lineal descendant of  Wolfgang Amadeus Mozart,

 

b.  Reincarnation of Froederick Fronkensteen,

 

 

c.  Tootsie … in the later years,

 

 

 

d.  Ernest Moniz, Secretary of the U.S Department of Energy

Other than Solyndra, what comes to mind when you consider the DOE (assuming that’s on your mind when an alternative is the NCAA baseball postseason)?

Many view the DOE as does the CATO Institute. Hear the video describing the DOE’s misguided programs over the years.  Let me summarize their point: Off-load regulation of nuclear energy to another federal agency, let private enterprise handle the rest, and save $25 billion every fiscal year.

If that isn’t enough, here is the agency, like the uninvited relatives who make themselves at home in your guest room and won’t leave, imposing your money and mine on a New Jersey wind farm project that state regulators rejected.

But if you like solar you’ll like this news of a solar power grant to the City of Chicago.

What has the DOE accomplished since 1978?  If its original purpose was to reduce U. S. dependence on imported oil? Not much, if I read between the lines of this recent Time Magazine article, which credits factors other than the DOE for recent progress.

But Let’s Not Jump the Gun 

Oil and gas people, before you get too smug, maybe you‘ve heard that the DOE was responsible for, or at least contributed to, the early research of hydraulic fracturing and horizontal drilling that led to the revolution in shale formation production? The report, complete with testimonials, sounds true.

If you think private enterprise can do most things better than government, you probably still say DOE needs to go, but perhaps you will also admit that it has done some good. Maybe you mean to say we need smarter government, not no government.

Musical Interlude

Let’s acknowledge this Administration’s double-talk on energy policy by considering the two-step. There is Jimmy Dale Gilmore‘s Texas dancehall version, which is nothing like the Eunice Two-Step, this one by Robert Bertrand.  (I chose it because  it has the translation.) These two places are separated by more than  just a narrow river.

Special thanks to cousin Paul Provenza for the inspiration for this post.