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Energy & the Law

What is Your Texas Legislature Doing for You Today?

Posted in Energy Policy, Local Ordinances

million dollar quartetThe Texas legislature has been busy on energy.

House Bill 40, similar to House Bills 539 and 540, steamrolled through the House of Representatives last week by a vote of 122 to 18. Reminds us of A L pitchers not rookies and the Rangers’ betting order.

The bill would preempt local control of oil and gas operations. If the bill becomes law political subdivisions could not enact or enforce ordinances that ban, limit or otherwise regulate an oil and gas operation within its boundaries.

Exceptions would be:

  • Above ground activity that governs fire and emergency response traffic, lights, or noise, or “reasonable” setback requirements;
  • That is commercially reasonable;
  • Does not effectively prohibit an oil and gas operation conducted by a reasonably prudent operator (hello Dallas and Denton); and
  • Is not otherwise preempted by state or federal law.

A regulation is prima facie commercially reasonable if it has been in place for at least five years and has allowed oil and gas operations to continue during that period.

See the House Research Organization’s analysis of who’s for and who’s against. You won’t be surprised at the lineups.

What Supporters Say:

  • To satisfy concerns that Railroad Commission surface regulations are insufficient and not enforced, the Legislature should fully fund the Railroad Commission and focus on improving state policies and regulations instead of off-loading that task to municipalities (good luck on the “fully fund” part);
  • The law would affirm the preemptive nature of state oil and gas regulations and reduce litigation (a cause dear to the heart of our legislature, regardless of the side effects);
  • Municipal regulations that effectively ban attempts to exploit natural resources deprive mineral rights owners of their property.
  • The law would affirm the dominance of the mineral estate (as has been the law of Texas since minerals were discovered).
  • The impact of operations are only temporary and can be mitigated by above-ground regulations such as setbacks, fencing, etc.
  • Establishes regulatory certainty.

What Opponents Say:

  • Even basic ordinances intended to insure public health and safety would be prohibited;
  • Effects of operations are felt most acutely at the local level, and municipalities are better equipped than state agencies to understand the effects of operations in their communities.
  • State agencies may not have the political will to enforce regulations to protect public health and the environment.
  • Gaps in state subsurface rules and regulations are filled by local ordinances, which would be preempted.
  • State regulations on oil and gas operations are notoriously weak.
  • Municipalities might have statutory obligations that cannot be performed without limiting subsurface activity.
  • Current law is sufficient to protect property rights. Regulatory takings are not inherently bad; property owners are compensated for a regulatory taking facilitated by municipal regulation.
  • Erosion of property rights is worthwhile if local regulations are necessary to protect neighborhoods from environmental degradation and public health consequences.
  • Oil and gas operations infringe on property rights of surface owners.

What Sam Phillips Did For You Yesterday

After watching Rhodes Baseball take three out of three from Millsaps, we had a holy experience Sunday in Memphis. The 8:00 a.m. Rite I service at Calvary Episcopal Church downtown was one, but I’m really talking about Sun Studio – “The birthplace of Rock and Roll”. Today’s musical interludes are the first studio recordings ever by these artists. What’s so new and different? Nothing, until you consider the best-selling tune of 1952 for perspective. Imagine the world before Rock and Roll and then listen:

Howling Wolf 1952 (not R&R of course, but it set the stage).

Elvis 1953

The Killer 1956

Three more next time, including two gents in the picture.

The Danger of “Too Much Information”?

Posted in Land Titles, Title Issues

bombI know contract writers who like to state terms, such as property descriptions, several different ways. If you just have to over-describe, at least be careful, and at least be sure the descriptions are consistent.

The McGregors and Millican were adjacent landowners fighting over a 34.28 acre wooded tract in Brazos County, Texas. The question:  Was the acreage in Millican’s chain of title. The answer: “No”. A 1945 deed in Millican’s chain conveyed 202 acres described by metes and bounds. It undisputedly included the 34.28 acres.

The Time Bomb Waiting to Explode 

A 1973 deed listed, as the “First Tract”, nine smaller parcels. Added together they totaled 1145.95 acres, though the deed did not mention that sum. One of the parcels was the 202 acre tract, and the previous deed was cited. So far, so good. A metes and bounds description was added, to “more fully describe” the First Tract, but that description did not contain the 34.28 acres. That tract was contiguous to the tract described in the metes and bounds. There were two inconsistencies: The general description purported to convey the 34.28 acres, but the metes and bounds did not. Second, the acreages for the nine parcels totaled only 1145.95, but the deed itself stated the total acreage was 1167.203.

The Rule – Kaboom

In case of conflict between two provisions in a deed, the more specific provision will control over general expressions that apply to the same land. This rule is not arbitrary, but is a means of discerning the parties’ true intent. Because the 1973 deed contained an unambiguous description – metes and bounds which did not include the 32.28 acres – reference to any other deed – such as the one that included he 34.28 acres – was not necessary to locate the tract. A metes and bounds description is more specific and better-indicates the parties’ intent.

Some Exceptions Apply, But Not Here

The court did allow that a metes and bounds description would not be given controlling effect if it is apparent from the language of the deed, read in light of the surrounding circumstances, that the parties intended that the general description should control, or when the grantor’s intention clearly and unmistakably appears from the language of the entire instrument. The clear intent for the general description to control in the face of a directly contrary metes and bounds description did not exist in this case. The court said it has never found a clear intent for a general description to control when directly contrary to metes and bounds that clearly defines an area. The general description can help when the specific description is “defective or doubtful.”  Mere inconsistency between the two does not itself render metes and bounds doubtful.

The Court of Appeals Rationale – Rejected

The court disagreed with the court of appeals on three points:

  • Lower court: The deed should be construed to convey the greatest estate its terms permit. Supreme court:  The preference for the greater estate does cannot overcome the clear and unambiguous specific description.
  • Lower court: The 1973 deed incorporated the 1945 deed by reference. Supreme court: The cases cited for that point did not focus on conflicts between general and specific descriptions. There were general statute of frauds discussions or general and specific provisions that could be reconciled.
  • The effect of the lower court opinion presented difficulties. The deed stated that the First Tract was composed of 1167.203 acres, but the description referred to nine parcels when added to together total only 1145.95. The metes and bounds description excluded the 34.28 acres but conveyed a larger area that the general description. To rule as the lower court did would create guesswork for future title examinations.

Percy Sledge RIP

No Equitable Extension of a Pennsylvania Oil and Gas Lease

Posted in Lease Disputes

Boss dismissing an employeeWhoa! I didn’t see this one coming. Pennsylvania lessees are not entitled to an equitable extension of the primary term of an oil and gas lease in the face of a legal challenge to the validity of the lease.

Half way during the primary term of a five-year lease, lessors the Harrisons sued Cabot in federal court seeking a declaration that the lease was invalid.  The Harrisons claimed to have been fraudulently induced to enter into the lease. Cabot sought its own judgment that if the suit failed the primary term of the lease would be equitably tolled during pendency of the suit.

Cabot’s claim – Do it like everybody else does it

  • The lawsuit created a cloud on title that prevented Cabot from prudently taking any steps to develop or commence operations on the leasehold as allowed by the lease.
  • Cases from Louisiana, Arkansas, Illinois, Texas and Montana, and Williams and Meyers establish, equitable extension as almost black letter law.
  • A party to a contract is entitled to the benefit of the bargain, of which the Harrisons were depriving Cabot by their suit.

The Harrisons’ claim – Hitch up your big-boy pants   

For their part, the Harrisons relied on these propositions:

  • The mere filing of a declaratory judgment action challenging a lease is not, in and of itself, refutation of the lease such that would “implicate judicial redress”.  In other words, the court expected Cabot to drill a well (which would have cost $4 – 7 million).
  • Big companies such as Cabot are capable of negotiating tolling provisions to account for a delay occasioned by a challenge to the validity of the lease.
  • The equitable extension principle is nothing more than a “judicial affirmative action program” for oil and gas companies which “abuses land owners who have done nothing other than exercise their legal rights”.
  • Don’t forget disparate bargaining power.
  • There is the “chilling effect” that an extension rule would have on landowners’ willingness to bring meritorious challenges. (Another way to see it: If the lessor loses he still ends up with what he bargained for – an oil and gas lease for a term during which the validity of the lease was not in question.)
  • Lease litigation is merely one of a number of risks encountered by oil and gas companies.

Winning the battle but losing the war

The federal district court awarded summary judgment to Cabot on the suit to invalidate the lease, but denied the counterclaim.  The case was sent to the Pennsylvania Supreme Court by the federal 3rd Circuit.  It was a case of first impression.

The court has historically required more than a mere judicial challenge to the validity of an agreement to demonstrate repudiation. In cases outside of oil and gas context the filing of a declaratory judgment action contesting the validity or scope of an agreement does not entail such an unequivocal refusal to perform.  The court declined to carve out an exception in oil and gas lease cases.

In Pennsylvania, a party repudiates a contract and thus effectuates an essential breach when it makes an unequivocal statement that he will not perform in accordance with the agreement. The Harrisons’ suit was not such a statement.

The court considered it a disservice to the legislative objectives of the declaratory judgment act to treat recourse to that procedure alone as a basis for altering material provisions of the agreement in controversy.

What does it mean?

  • A Pennsylvania court will require an affirmative repudiation of a lease, which a suit to declare a lease invalid is not.
  • What about a letter to the lessee that walks like repudiation and quacks like repudiation but stops just short of outright repudiation?  It depends. Is it “unequivocal”?
  • Landmen – get out your tolling agreement forms ready for every new lease in Pennsylvania.
  • Mineral owners – you now have a nifty but shifty new way to run off that lessee you don’t like.
  • It also works if you just want more bonus money.

Pennsylvania’s message to the oil business.

Obama Approves Keystone Pipeline and Other News- Special Edition

Posted in Energy Policy

LesserPrairie-Chicken-Vyn_090420_0194It was an abrupt and remarkable about-face. In a Rose Garden ceremony in the presence of the CEOs of America’s largest oil companies and special guest David Koch (brother Charles remained ball-gagged and handcuffed by the editorial board of The Nation), President Obama signed an executive order fast-tracking construction of the Keystone XL Pipeline and, to the astonishment of all in attendance, promised federal subsidies and loan guarantees to TransCanada Corporation for the facility. In his remarks the president said, “It’s high time the helping hand of my all-powerful and omnipotent administration come to the aid of our country’s most popular and vital industry. Our citizens will no longer be denied the high-polluting, pet-coke discharging, energy-sucking Canadian tar sands oil so necessary to maintain their wasteful and profligate lifestyles and, in the case of Al Gore and Pharrell Williams, that precious fuel that sends their Gulfstream G650’s to the next global-warming summit.

Environmental activist Yoko Ono’s reaction was as lucid as we have come to expect. For their part some Republicans were, as they often are, chagrined, although in this case no one knows why.  (This post is interactive: Visualize your favorite chagrined Republican now).

In other news today:

Sports

LSU quarterback Anthony Jennings appeared on the 2015 Heisman Trophy watch list.  The pundits predict a 72 percent pass-completion rate, achieved solely by screen passes to Leonard Fournette.

Alternative Energy

Prominent environmentalists condemned wind and solar power, remarking that solar is “too hot and burns up too many cute little birds when they fly over”, and wind is “unreliable; its sharp and unforgiving blades pulverize bigger-but-still-cute birds into bite-sized chunks for the coyotes, and its tall towers endanger the lesser prairie chicken, that flightless, cute kind-of-little bird so beloved by the several ranch hands in West Texas who come into contact with the species every year”. Solar is fine for Bubba from Mississippi. “Them critters drop right out of the sky, all fried up good and well done, just how I like ‘em. And it saves Lurleen from another day in the kitchen.”

Religion

After 17 ballots the Episcopal Diocese of Dallas elected its first openly gay bishop, who narrowly defeated a Hispanic woman from the Rio Grande Valley and a transgender African-American person from the Diocese of New Hampshire. The early favorite – the middle-aged white guy (Diocese of Quincy, ACNA) – was eliminated early. In his post-election remarks the new bishop, who most-recently served as rector of Saint Stonewall Church of the Heavenly Liberation (Diocese of California) said, “I look forward to the warm and loving embrace – spiritual, of course – of my new flock, where I am destined to encounter, at long last, the  “orthodox” Episcopal church.

Grievance Leftism

Al Sharpton paid his delinquent tax bills, renounced the millions in protection money extracted over the years from major corporations, resigned his membership in posh New York private clubs, took up residence in a cardboard box in Megyn Kelly’s front yard, and began medical treatments to turn himself Caucasian. In a press conference in which all the words were pronounced correctly he rejected his sordid history of race-baiting, apologized to the New York police for the Tawana Brawley incident, and denied that he ever really believed Officer Wilson should in any way be prosecuted for the Michael Brown incident.

And finally this, to explain the day.

A Lesson in Lease Administration

Posted in Lease Disputes, Royalty Disputes

michael-fredo-corleone-jpgCo-Author Brooke Sizer

What must a Louisiana lessee do to avoid statutory penalties for non-payment of royalty, and what must a royalty owner do to put the lessee on notice that royalties are not being paid? The answers are, more than the lessee did in Samson Contour Energy E&P, LLC v. Smith and less than the lessee argued for.

What the Lessee Did

  • When calculating royalty payments for six new wells on a lease, mistakenly used old and obsolete ownership information and paid royalties attributable to a disputed interest to one party not entitled to it.
  • Ignored notices of unpaid royalty under Mineral Code Art. 137 that did not include a demand for payment.

What the Lessee Could Have Done

  • Pay closer attention to its lease records.
  • Pay closer attention to notices from the royalty owner of deficient royalty payments.
  • Suspend disputed funds (which requires paying closer attention … ).

Facts

Half of the property belonged to the mother, one-quarter to the son, and one-quarter to the daughter. The land was HBP under a lease from 1970s. In 1996, the mother executed an act of donation giving her half of the mineral and royalty interest to son Billy. Similar to what Michael did to Fredo but not as permanent, after Momma died daughter Betty sued to annul the 1996 donation. Samson was informed of the annulment action and suspended royalty for the one-half interest. In 2005 Samson received an uncertified photocopy of a judgment annulling the donation and transferred the subject one-half to the Succession.

Samson drilled six wells that were completed sometime after the disputed interest was originally suspended. When calculating royalty for the new wells, Samson mistakenly used old ownership information and paid the royalties attributable to the disputed one-half to Billy.

A Legitimate Mistake?

The co-administrators of the Succession requested that suspended royalty funds be paid to the Estate. Samson acknowledged receiving the letters of administration and stated that the records had been updated. Later, one of the administrators informed Samson that the records they had received from Samson failed to include the six wells. Samson responded that the Estate did not own any interest in those wells. The administrators each sent Samson another copy of the annulment judgment. Samson then issued a check that still underpaid the Estate by failing to include royalties attributable to the six wells.

The Argument

Samson claimed:

  • Payment to son Billy was the same as paying the Succession; they should not be treated separately.
  • Based on language in the lease, because it did not receive a certified copy of the annulment it could not be liable.
  • Notice under Mineral Code Art. 137 was insufficient to trigger the penalty because it did not include a demand for payment and did not provide information so that payment could be made.

The  Result

Samson failed to follow industry practice in using old information for paying royalties and not adjusting royalty payments after the mistake was discovered.

Samson failed to fulfill its duty as a lessee under the Mineral Code to pay or respond with a reasonable cause for nonpayment within 30 days after receiving notice that payment was incorrect.

The Art. 137 notice has a purpose: To merely inform the lessee he has not paid the royalties deemed by the lessor to be due. It is a chance for the lessee pay royalties due while giving them a chance to avoid the harsh remedy of a lease cancellation. Numerous communications reasonably alerted Samson to the payment failure pursuant to Article 137. Samson failed to explain what caused the error, instead choosing to ignore the error and question the administrator’s right to act on behalf of the Succession.

Samson owed the Succession $1,301.149.13 in royalty payments and double the amount due as penalty. Judgment rendered for $2,602,298.26 in damages, plus interest and $505,000 in attorney fees.

Takeaways

  • Send this post – or better yet the entire opinion – to all of your lease administration personnel.
  • The operator who swings and misses this often is not going to like the justice meted out by most Louisiana trial judges and juries.
  • Woe to the operator who fails to recognize that Louisiana courts set a low bar for a lessor to comply with statutory notice provisions similar to Art 137.
  • Hats off to Samson lawyers for a creative but – given the facts – predictably unsuccessful effort.

 Our musical interlude honors Samson’s “fighting spirit”.

Must the Lessee Be Wary of the Executive Right Owner?

Posted in Lease Disputes, Royalty Disputes

win loseYou are negotiating to take a big oil and gas lease. The run sheets show you are dealing with an executive right owner on behalf of himself and his NPRI owner.  His proposed terms are odd: a lower-than-market royalty and a higher-than-market bonus. After reflecting, you get it: The terms aren’t odd; they are just better for him than the NPRI owner. Is he cheating his NPRI owner? If you suspect he is, must you come to the aid of the soon-to-be-shortchanged NPRI owner or else get sued along with the larcenous executive?

Don’t worry. Bradshaw v. KCM leaves virtually no chance that a lessee will be derivatively liable to an NPRI owner for an executive’s wrongdoing. We discussed the NPRI owner’s claims against the executive last week. The NPRI owner also sued Range Resources, the lessee who took the lease from the executive.

Bradshaw’s claim against Range was that KCM’s breach of its duty should be imputed to Range under civil conspiracy and aiding and abetting theories. Not so, said the court. Range and KCM were not affiliated with one another except as adverse parties in an arms-length transaction (to-wit, the oil and gas lease). There was no claim that Range owed an independent fiduciary duty to Ms. Bradshaw. This is obvious because the lessee’s interests are inherently adverse to both the executive and the NPRI.

There was no evidence that Range was complicit in KCM’s alleged underlying tort. In negotiations between the two, Range sought to extract the best deal it could on the most favorable terms. The mere fact that Range knew the estate was burdened with Bradshaw’s NPRI was insufficient to impute KCM’s liability, if any, to Range.

The court observed that if it were to validate Bradshaw’s theory of liability it would be difficult to conceive of a context in which a lessee would not owe a derivative fiduciary duty to the other side of the bargaining table.

Even if there were an imbalance in the lease terms that substantially favored Range, that would not be evidence that Range acted improperly. The court believed that in a broad sense almost any bargain for a commercial exchange might be considered benefiting one party at the expense of the other. (Ironically, the court cited a Wal-Mart case for this proposition.)

Simply put, said the court, a lessee is not be expected to consider an NPRI owner’s economic interests. That is the executive’s responsibility.

In the spirit of today’s musical interlude, the court has made negotiating easier on the lessee.

The Executive Right and the NPRI – What is the Relationship?

Posted in Lease Disputes, Royalty Disputes

The duty owed by the executive right holder to its non-participating royalty interest holder in Texas, long haunted by the ghost of Clinton Manges, is again examined. From KCM Financial, et al. v. Bradshaw and its precursors …

We Know This:

  • The executive owes the NPRI owner a duty of utmost good and fair dealing.
  • It is not a typical fiduciary relationship, in that the executive is not required to wholly subordinate its interests in favor of the non-executive.
  • The duty is one of autonomy, but not absolute discretion, to determine the value of the non-executive interest.
  • There is no bright line rule to comprehensively or completely delineate the boundaries of the executive’s duty.
  • The executive’s duty is to acquire for the non–executive every benefit that he exacts for himself.  That is not the same as putting the interests of the beneficiary ahead of the executive.
  • In evaluating whether an executive breached the duty, evidence of self-dealing can be pivotal. In the absence of self-dealing this court is not likely to find a breach of the duty.

The Facts:

The executive – KCM – granted an oil and gas lease with a below-market royalty shared equally by the executive and Ms. Bradshaw, the NPRI owner, in exchange for an above-market bonus payable only to KCM.  A 1960 deed creating the interest referenced reservation of an undivided one-half royalty, tied to the “customary“  1/8th royalty. The parties agreed that the NPRI is a fraction of the royalty that could float above the floor specified in the lease.

As we know, the customary royalty in the mid-2000’s was closer to a 1/4th than 1/8th.  KCM granted a lease reserving a 1/8th royalty and a bonus of $7,505 per acre. Bradshaw was entitled to 1/16th (half of the 1/8th), but none of the bonus.

As is usual in these cases, Manges v. Guerra came into play. That case is worth reading to see just how brazen and despicable an executive right holder can be and to see what “pervasive self-dealing “ looks like.

The Court’s Rationale:

Without the duty of good faith and fair dealing the actions of the executive could be exercised arbitrarily to in effect destroy all value of the non-executive’s interest, appropriating its benefit to the executive.

The court refused to conclude that the availability of a higher royalty rate could be categorically included in or excluded from the scope of the executive’s duty.  This is due to the myriad components of any given arrangement that could affect the overall value of any lease, including royalties, delay rentals, bonuses and other provisions.  Acquiring the same royalty in a lease does not automatically equate to acquiring the same benefit because of the bonus, in which the executive had no interest.

To the court, it will come down to whether the executive misappropriated what would have been a shared benefit (market value royalty) and converted it into a benefit reserved only to himself (an enhanced bonus).

There was enough evidence that could be self-dealing to return the case to the trial court.

What about the Lessee?

Out of space; tune in next week.

See our musical interlude for what every executive right holder should embrace.

Denbury Part II: Big Changes Coming in Texas Pipeline Condemnations ?

Posted in Construction, Eminent Domain

ernieCo-Author Martin P. Averill

Is Denbury’s Green Pipeline a common carrier? That question is alive and well in Texas. In Texas Rice Land Partners Ltd. v. Denbury Green-Texas Pipeline, LLC,  the Beaumont court of appeals reversed a summary judgment granted by the trial court to Denbury, applying the Texas Supreme Court’s “reasonable probability” of public use standard (announced in the original Denbury Green appeal).  The case will now be in the hands of a Jefferson County jury unless the Texas Supreme Court reviews the decision.

What’s Next?

This decision is likely to strike fear in the hearts of pipeline operators.  For many decades in Texas, the power to condemn private land for a pipeline project was nearly absolute.  Landowners were relatively powerless to prevent a taking.  The original Denbury Green decision gave landowners a way to challenge a pipeline’s right to take their property. Pipeline operators will now likely face extended battles in courthouses throughout the state, including discovery and other procedures that never would have been allowed in years past.

Takeaways

  • Texas Business Organizations Code §2.105’s “fill-in-the-blank” process is not an independent ground for common carrier status—the pipeline operator still must meet the “reasonable probability” of public use standard.
  • Denbury’s proofs were not sufficient to rule out an issue of fact for a jury to decide. The public-versus-private intent of the operator must be judged at the inception of the plan to construct the line.  Contracts executed well after that time, as Denbury’s were, are not definitive.  The court also noted that whether these contracts establish a public use is a matter for “reasonable jurors” to decide.
  • The subjective beliefs of an operator are not probative; for instance, anticipating future contracts, third party use, or availability for public use.  A use is a public use “only when there results to the public some definite right or use in the business or undertaking to which the property is devoted.”
  • Contracts between Denbury Green and Denbury Onshore, ratified by some other small working interest owners, were not enough to establish public use, at least for purposes of summary judgment.  Also, ExxonMobil did not ratify these contracts for its 9.7% interest, and other interest owners do not take title to nor possession of CO2.
  • The public interest in a pipeline project must be substantial.  According to the court, “Specifically, the evidence raises a fact issue regarding whether the taking serves a substantial public interest.”
  • A jury trial is the best way to decide issues of knowledge and intent. Those faccts are rarely appropriate for summary judgment.

Lagniappe

Here is a link to an excellent presentation by Marty to the Energy Law Section of the Houston Bar Association.

Here is another pipeline reaction.

What Can I Get From My Lessee if I Ask the Court For It?

Posted in Lease Disputes

pleadingCo-author Sandra L. Mazan

It s been said that if you don’t ask for what you want you’ll get what you deserve.  Mr. Hooks took that truism to heart.

Hooks v. Samson is about more than the discovery rule (See last week). Here are the other claims at issue:

Most Favored Nations Clause

In royalty suits the court must rely on the language of the agreement at issue. Nevertheless, general principles of oil and gas law inform the court’s decision.

The “most-favored nations” clauses required Samson, if it paid higher royalties on nearby leases, to pay matching royalties to Hooks. Hooks alleged that Samson paid a higher effective royalty rate to the state of Texas. Samson responded that the higher effective rate was not the result of a higher royalty, but rather was the result of increasing the State’s “unit royalty interest” in order to induce the State to agree to a pooling agreement.

The court applied the “primary legal consequence” of pooling to resolve the issue: Production anywhere on a pooled unit is treated as production on every tract in the unit. The court reached way back to Montgomery v. Rittersbacher:

Pooling “effects a cross conveyance among the owners of minerals under the various tracts of royalty or minerals in a pool so that they all own undivided interests under the unitized tract in the proportion by contribution bears to the unitized tract”.

Royalty owed on production from the whole unit is necessarily tied to the royalty owed on production from the lessor’s tract. To increase one is increase the other.

Samson’s increase of the State’s royalty on unit production meant that the State’s 25% lease royalty was really 28.28896%.

Score a run for Hooks. (Humor me. Spring training is on.)

Formation-Production Clause

Each lease said:

“For the purposes of calculating all royalties payable under Article III herein, it is expressly provided that all such calculations shall be based on formation production as reported on Texas Railroad Commission Forms P-1 and P-2.”

The issue was gas that left the reservoir as gas and produced at the surface as condensate. When reporting the total volume removed from the reservoir, Samson would convert the volume of condensate at the surface to its equivalent volume as a gas. Samson paid royalties on proceeds from sales rather than on total amount of formation production. Hooks claimed this clause required that a royalty be paid on liquid condensate, which must then be converted to its equivalent in gas volume so that another royalty must be paid on it. Samson responded that such an interpretation imposed a double royalty by requiring that Samson pay royalties on condensate twice. The court agreed.

Score a run for Samson.

Wrongful Pooling

 Samson pooled the Hooks leases into a unit, effective as of first production. Samson amended the unit designation and notified Hooks that the name was changed. The amendment also significantly altered the unit boundaries.

Hooks claimed that Samson did not have the unilateral right to “unpool” Hooks’ leases. The Court invoked ratification and waiver. Because Hooks did not deny the validity of the new unit, which existed only after Hooks was notified that the old unit was being amended, he could not later assert that he should also receive royalties from the old unit.

Score a run for Samson.

Offset Well Obligation

Two of Hooks’ leases required that if a well were completed within 1,320 feet of Hooks’ lease line but not unitized with Hooks’ acreage, then within 90 days Samson must either drill an offset well, pay royalties, or release the offset acreage. Because the statute of limitations did not apply to the compensatory royalties that might have been owed within the preceding four years, the court remanded for the court of appeals to consider the merits.

Score a runner on third for Hooks. This contest will go to extra innings.

Texas Supreme Court Relaxes Its Grip on the Discovery Rule

Posted in Lease Disputes
grip2Co-author Sandra L. Mazan

The Texas Supreme Court – that elephants’ graveyard of claims and causes of action – has sided with a lessor-plaintiff who relied on the discovery rule to defeat a limitations defense.  For the many with low expectations when the court agreed to review this case, this result is a welcomed surprise.

We discussed Hooks, et al. v. Samson Lone Star, Limited Partnership in a prior post, wondering if the Court would actually allow a plaintiff to invoke the discovery rule, something it has been loath to do ever since HECI Exploration v. Neel.

The Lie and Its Aftermath

Hooks sued Samson, alleging fraudulent inducement arising out of three oil and gas leases from Hooks, as lessor, to Samson, as lessee, in 1999.  (Other claims will be discussed in a future post.)  A Samson landman had submitted a plat to the Railroad Commission which misrepresented the bottomhole location of a well. It took Hooks a long time to discovery the fraud, and Samson argued that Hooks should have had acquired knowledge of the true bottomhole location from earlier RRC records (a directional survey and its associated plat). The Supreme Court disagreed.  Where the most-recent record show an inaccurate location, “reasonable diligence” does not require a review of earlier records.

Who Decides?

The jury determines whether a mineral owner, in the exercise of reasonable diligence, discovered or should have discovered the fraud foisted upon him.  But the existence of information in the public record may, as a matter of law, establish a lack of diligence in the discovery of fraud. This is because the public record gives everyone constructive notice of its contents, even records the plaintiff doesn’t examine. but that is not the case where the records themselves are tainted by fraud.

Earlier cases ruled that reasonable diligence requires sophisticated lessors to acquaint themselves with “readily accessible and publically available information” from RRC records.  As a matter of law the lessor is bound by the knowledge he would have obtained had he investigated the records. (Don’t be misled by that language: The royalty owner doesn’t have to be sophisticated to be done in by the rule. See HECI).

In Shell Oil Co. v. Ross, it was an oil and gas attorney; in BP America Production Co. v. Marshall it was a sophisticated plaintiff who “understood the oil and gas industry”.  A well log and plugging report that contained, in the words of the court, “highly technical information”, resulted in a ruling that as a matter of law Marshall would have been able to discover BP’s fraud through the use of reasonable diligence.

The difference was that in those cases the public record was not itself tainted by fraud.

Is This a Game-Changer?

Probably not.  We detect nothing in the opinion suggesting the Court intends to relax the basic rule: Royalty owners overlook, or naively ignore, the contents of public records at their peril.  With this musical interlude defendants remind the Supreme Court that it is their sweet and special friend against populist juries and disobedient appellate courts inclined to side with the royalty owner-plaintiff.