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Energy & the Law

Lipsky Revisited – Details and Debate

Posted in Hydraulic Fracturing, Litigation, Pollution

dunceI often wonder if anybody actually reads our modest, quasi-weekly offerings. They do! And they respond! To criticize!  I earn my keep being “critiqued” by impatient judges, aggressive opposing counsel and, occasionally, less-than-happy clients, so – challenge accepted.

“Critique” One:

Lipsky was not Range’s lessor, therefor I know nothing about the case. Surely, this person lives in my house, where I enjoy a long history of knowing nothing about anything. (Memo to self: check progress on subpoena for kids’ “sent” box). And the inquisitor is as adept as my beloved family in drawing expansive and incorrect conclusions from meager evidence.

As for Mr. Lipsky, he was a nearby landowner and not a lessor.  But the point – and the lesson – remain the same: His big mouth spread accusations that Range says are untrue. Range wanted to put a stop to it and was partially rebuked. Whether against a lessor or a stranger, it will be more difficult than in the past for anyone to use litigation as a tool to quash criticism.

“Critique” Two:

The EPA did not find Lipsky’s claims to be false, says our inquisitor. To evaluate this one, let’s use the time-honored, citizen-friendly, and court-validated process invoked by the TCPA: Can the reader draw rational inferences from circumstantial evidence in determining what the EPA believed about Mr. Lipsky’s claims?

What Really Happened?

The Railroad Commission ordered Range to test its gas, launched an investigation, and held a formal hearing – in which Mr. Lipsky and the EPA were invited to participate (they declined). The RRC considered scientific testimony on “geology, hydrogeology, microseismic analysis, hydraulic fracturing, geochemical gas fingerprinting, and petroleum engineering” and determined that gas in Mr. Lipsky’s water well was most likely from the Strawn formation, found at 200 to 400 feet, and not the Barnett Shale, from which the Range wells produced at 7,000+/- feet, and that Range’s wells did not contribute to the contamination. Shortly thereafter, the EPA – declining to explain why – withdrew its earlier finding that Range’s wells were an imminent and substantial endangerment to a public drinking water aquifer. The inquisitor blames “political pressure”.

A Quiz:

Who had the motive and stroke to apply “political pressure” on the EPA to withdraw its report?

A.  EPA BFF then-Gov. Rick Perry

B. Sen. Ted “Hands Across the Aisle” Cruz

B. Al Armendariz

C. The ghost of George Mitchell

Who is it?

Who is our nemesis, the avenger of truth, the harbinger of a world purified by its abstinence from hydrocarbons? The inquisitor claimed to be “Sharon Wilson”. Given the anger revealed in the communications and on a certain Website, I assume it is “Texas Sharon”. Those running for high office adhere to a cardinal rule: Never name your adversary. However, this is a public service. When you hear a story, consider the source. Get to know Texas Sharon as a source. Then draw your own inferences, rational or otherwise.

Answer to the Quiz:

Nobody. It was a trick question. My “inference”: The EPA realized they were wrong and, wisely, drug the report off into a gloomy corner of the bureaucratic netherworld where it died, alone and abandoned, shorn of its misshapen graphs, charts and footnotes.

In the name of “debate”, we have this musical interlude.

Invasion Update:

The dog barked last night; thought I heard the rumble of tanks from the invasion. Turned out it was just thunder.

How Are the Texas Anti-SLAPP Statute and Jade Helm 15 Alike?

Posted in Hydraulic Fracturing, Litigation, Pollution
Here The Come

Here They Come

May a court “draw rational inferences from circumstantial evidence” when determining if a plaintiff  has met its burden in a suit in which the defendant has invoked the Texas Citizens Participation Act . That was the question in In re Lipsky.

What is The Anti-SLAPP Statute?

The purpose of the TCPA (the “Anti-SLAPP” statute) is to protect citizens from retaliatory lawsuits seeking to intimidate or silence them on matters of public concern. The procedure for expedited dismissal of such suits involve a two-step process: First, a defendant-movant must show by a preponderance of the evidence that the plaintiff’s claim “is based on, relates to or is in response to the movant’s exercise of (1) the right of free speech; (2) the right to petition; or (3) the right of association.” If the movant demonstrates that the plaintiff’s claim implicates one of those rights, the burden shifts to the plaintiff to establish by “clear and specific evidence” a prima facia case for each essential element of the claim.

Applied to Lipsky and Range

Mr. and Mrs. Lipsky sued Range Resources for polluting their water well by Range’s gas wells in the area. You will remember the infamous video of Mr. Lipsky lighting the garden hose on fire. (Ultimately the Lipsky’s claims were determined by the Railroad Commission and the EPA to be false.) Range counterclaimed, alleging defamation, business disparagement and civil conspiracy. The Lipskys moved to dismiss the counterclaim under the TCPA.

The court focused on the second prong. Lipsky said “clear and specific” means “evidence unaided by presumptions, inferences or intendments”.  No, said the Supreme Court. In TCPA cases, like in others – fraud for example – “clear and specific evidence” can include drawing of inferences from circumstantial evidence. That’s the way people make decisions about a lot of things.

The court decided that Range’s evidence would support a claim for defamation but not business disparagement, and there was no clear and specific evidence to support a case against Mrs. Lipsky or consultant Alisa Rich. Range’s only remaining claim is against Mr. Lipsky for defamation.

What Does This Mean To Me?

Operator: You can’t intimidate your loud-mouthed lessor as easily as your predecessors once could.  Lessor: You are still on the hook for crushing legal fees and potential big-money liability if you persist in wildly exaggerated or untruthful accusations to anyone who will listen.  The anti-frackers aren’t your friends. They will repeat it, truth-be-damned, to anyone who will listen, causing you more grief and despair than you bargained for.

One if By Land, Two if By Sea 

While we’re here, let’s apply Lipsky to the real world. What “rational inferences from circumstantial evidence” can our elected officials draw so as to conclude there is a risk that the U. S. Government, in conducting its Jade Helm 15 military exercise, intends to invade the state, convert vacant west-Texas Walmarts to detention facilities, and incarcerate the true patriots? You could ask it this way: How irrational is it to believe that home-grown SEALS and Green Berets are going to storm the Rio Grande, pillage and plunder their way north to Dallas, and turn their wives, mothers, sisters, fathers and brothers over to the CIA? Prove to me they won’t, I guess.

Two musical interludes – one “subversive”, one not:   RIP Jack Ely and Ben E. King.

Your Texas Legislature at Work, Part 2

Posted in Legislation

tx capitolThe Texas legislature is still busy on energy issues. Is that good or bad? It depends on your situation; oil patch thieves won’t like it.

Wind Energy

Senate Bill 931 would blow away the Renewable Portfolio Standard, established in 1999 to set renewable energy goals for Texas. The bill would also halt construction of transmission lines in Competitive Renewable Energy Zones, through which miles of transmission lines connect West Texas wind energy with cities in the eastern part of the state.

The rationale is that wind energy targets in the original act have attained their goal and thus should be terminated. Here is a discussion of the bill.

Wind energy proponents are unhappy. See, for example, this editorial in the Dallas Morning News by Jim Marston of the Environmental Defense Fund. Among other complaints, he cites a double standard:

Oil and gas subsidies = good

Alternative energy subsidies = bad.

They seem to have a point.  Texas gives tax incentives for certain oil and gas production. What’s the difference?

Allocation Wells

House Bill 1552 would add a provision to the Natural Resources Code to address allocation wells. The high points are:

  • The statute would apply unless expressly prohibited by a lease, deed or other contract.
  •  An operator may obtain a RRC permit allowing it to drill, operate and produce from a well that traverses multiple tracts in order to prevent waste, promote conservation, or protect correlative rights.
  • Absent an agreement among affected owners of royalty or mineral interests regarding how to allocate production among the tracts, production will be allocated to each tract on in the proportion “that the operator or lessee reasonably determines or reflects the amount produced from each tract.”
  • The operator must send written notice to affected royalty and mineral owners.
  • If there is an agreement with a royalty or mineral owner allocating production, the agreement will prevail.
  • An affected owner unhappy with the allocation assigned by the lessee may request a RRC hearing on whether the production will harm the correlative rights of working interest and mineral owners, is necessary to prevent waste, and accurately attributes to each affected owner its fair share of the aggregated production.

If the bill passes I will discuss what its effect might be.

Oil Field Theft

House Bill 3291 establishes the crime of selling oil, gas or condensate without a Railroad Commission permit. The bill specifically includes oil and gas equipment or pipeline equipment. If the value exceeds $10,000 it’s a felony.

How do they do it?

In case you are looking for a new line of work: According to proponents of the bill, one way to steal production is to purchase a well that has ceased to produce for lack of production and claim that it is producing and selling oil stolen from another well.  Then you acquire a vacuum truck and help yourself to what’s not yours.

A Religious Experience, Part 2

As promised last week, here are the other artists “discovered” by Sam Phillips and recorded for the first time at Sun Studio:

Johnny Cash 1955

Carl Perkins 1956

Roy Orbison 1958. This one can’t be beat for its intellectual content.

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.