The question in Brooke-Willbanks v. Flatland Mineral Fund LP, et al was which party to a Texas mineral deed would bear the burden of two previously reserved nonparticipating royalty interests.

The facts

Kay Brooke-Wilbanks owned a 45/100 mineral interest in 320 acres in Howard County, which is equivalent of an undivided 144-acre mineral interest. Her conveyance to Flatland was of an “undivided 72 net mineral acres in 320 acres” and was subject to subsisting oil and gas leases. There were no reservations or exceptions. At the time of the conveyance there was a lease with a 3/16 royalty. During negotiations for a sale of 36 net mineral acres to Expedition, Flatland became aware of two NPRI’s arising out in the 1940’s that burdened the mineral interest. Flatland asked Brooke-Willbanks to execute a correction deed. She refused and sued Flatland to quiet title and for a declaratory judgment.

The question

Did the parties intend that the previously reserved NPRIs would burden Brooke-Willbanks only or the parties proportionately?

The parties disagreed as to the meaning of “net mineral acre”, which treatises have defined this way (thank you Cliff Squibb): “One net mineral acre is typically considered to equal the fee simple mineral estate in one gross acre of land.”  The court determined that “net mineral acre” as used in the granting clause was subject to only one reasonable meaning: an undivided fee simple mineral interest in the 72 acres that Brooke-Willbanks conveyed to Flatland, including the right to receive royalty payments therefrom.

The court harmonized all parts of the deed to give effect to all of its provisions. The subject-to clause further clarified the intent of the parties. In the ordinary sense, subject-to clauses limit the estate and associated rights that are granted to a party. At the time of the conveyance, Brooke-Willbanks owned only a possibility of reverter and a royalty interest.

The court determined that the parties intended that Flatland would take its interest subject to the outstanding existing oil and gas lease and receive the same interests that Brooke Willbanks possessed, which was a future reversionary interest and a royalty interest in the 72 acres.

The subject-to clause also clarified the amount of royalty interest conveyed. A severed fraction of a royalty interest such as an NPRI generally would burden the entire mineral estate because it necessarily limits the royalty interest attached to the underlying mineral interests. This principle informed the court’s interpretation of the deed but did not compel an outcome because parties are free to contract for whatever division of interest suits them.

The subject-to clause clarified that Brooke-Willbanks granted “ …. the above stated interest and the grantor’s interest in the royalties … “, which was the royalties in 72 acres. The clause limited Flatland’s interest as grantee to what Brooke-Willbanks possessed at the time, which was royalties associated with 72 acres. There was no express intent to convey anything otherwise.  By the use of “net mineral acres” the parties expressed an intent to convey a fixed amount of mineral acres.

The court declined to follow the estoppel principle defined in the Duhig Rule.  The court also relied on the recitation that it was the specific intent of the instrument to convey “the right to receive all royalties associated with the interests conveyed”.  This indicated that the intent was for Flatland to take the royalty interests associated with the undivided 72 acres as it existed at the time of the conveyance.

The answer

The outstanding NPRI’s burdened the parties’ royalty interest proportionately.

David Crosby, RIP.

You have your

Byrds Crosby

CSN Crosby

Solo Crosby

Co-author Brittany Blakey

The takeaway from Hahn v. ConocoPhillips Company is that in Texas a NPRI holder may not diminish his rights by ratifying pooling of an oil and gas lease unless there are provisions explicitly purporting to do so.

 Kenneth and brother George each owned ½ of the surface estate of a tract and ¼ of the mineral estate. Siblings and Charles owned the rest. Kenneth and George partitioned the tract into Tract A and Tract B. Kenneth sold his interest in Tract A to the Gipses, excepting  ¾ of the minerals, which belonged to his three siblings, as well as this NPRI:

“ … a … [1/2] non-participating interest … (Same being an undivided [1/2] of [Kenneth’s 1/4] or an undivided [1/8] royalty)…”.

The Gipses entered into an oil and gas lease with Conoco, reserving a ¼ royalty. Conoco then pooled Tract A into the Maurer Unit B, which Kenneth ratified, and Kenneth and the Gipses executed a stipulation of their interests in Tract A, stating that “it was the intent of the parties in the deed from [Kenneth] to [the Gipses] . . . that the interest reserved was a one-eighth (1/8) ‘of royalty’ … .”

Kenneth then leased his ¼ interest in Tract B to Conoco, which was also pooled into the Maurer Unit B. Kenneth was advised by Conoco that it would “no longer be crediting him with his ¼ mineral interest in Tract B.” Based on the 2002 partition deeds, Conoco believed Kenneth conveyed all of his surface and mineral rights in Tract B to George, and George conveyed all of his surface and mineral rights in Tract A to Kenneth.

Prior Appeal

Kenneth sued the Gipses and Conoco to confirm his ownership in Tracts A and B. The Court of Appeals in 2015 determined that the parties had these interests:*

OwnerTract ATract B
George0% surface or mineral interest100% surface & ¼ mineral interest
Kenneth0% surface and 1/8 fixed NPRI0% surface and ¼ minerals
Gipses100% surface, ¼ minerals less Kenneth’s 1/8 NPRI0% surface or minerals

After the case was remanded to the trial court a royalty calculation dispute arose. Conoco and Kenneth disagreed as to whether Kenneth’s NPRI should be reduced by the Gipses’ ¼ lessors’ royalty. Stated another way, Conoco argued that notwithstanding the court’s conclusion that Kenneth reserved a fixed 1/8 NPRI in Tract A, his ratification of the Gips lease transformed his fixed NPRI into a floating one. Therefore, said Conoco, Kenneth was to receive 1/8 × 1/4 of the royalties.

On Appeal

The appellate court disagreed. In Texas, pooling effects a cross-conveyance among the owners of minerals under the tracts of royalty or minerals in a pool so that they all own undivided interests under the unitized tract in the proportion their contribution bears to the unitized tract.”

Also, an executive lacks the power to pool a NPRI absent the NPRI owner’s consent, such as by ratification. If the NPRI owner ratifies, the lease effects a cross-conveyance of interests and a pooling of his or her royalty interests.

By ratifying the lease Kenneth agreed to nothing more than subjecting his fixed 1/8 NPRI to Tract A’s tract participation factor in Maurer Unit B. The court rejected Conoco’s assertion that Kenneth could not ratify the Gips lease for pooling purposes only, distinguishing prior Texas case law on ratifications and NPRIs.

The effect of Kenneth’s ratification of the Gips lease was only to bind him to the lease’s pooling provision. Therefore, Kenneth was due his fixed 1/8 royalty from Tract A.

For you trial lawyers, the court also addressed the “law of the case” doctrine.

*We ignore the other two siblings for this report.

Jeff Beck RIP.

The question in Kim R. Smith Logging Inc. v. Indigo Minerals LLC  was whether a disgruntled Louisiana royalty owner sent its demand for unpaid royalties to the right party.  It turns out that it did.

Mineral interest owner Cherry executed an oil and gas lease. Plaintiff Smith Logging purchased the property and Cherry retained his mineral interests. Operator Indigo/SWN* drilled four Haynesville wells.  

The original lessee assigned the lease to Hopkins. Effective as of August 1, 2019, Hopkins assigned the lease to Valor.  By a December 12, 2019, agreement, also effective as of August 1, 2019, Valor transferred its interests to Indigo/SWN and reserved an override

On November 1, 2019, Smith Logging made a 30-day demand to Indigo/SWN for payment of unpaid royalties under the lease. Counsel for Indigo/SWN confirmed that the royalty was owed.  Indigo/SWN made three payments. The assignment to Indigo/SWN has not been recorded at the time of Smith Logging’s demand.

Smith Logging sued Indigo/SWN, Valor, and Hopkins for cancellation of the lease, damages in the amount of unpaid royalties, damages in the amount of double the unpaid royalties, and attorney fees, alleging on information and belief that Indigo/SWN was the lessee.

Indigo/SWN asserted a dilatory exception of prematurity and a peremptory exception of no cause of action. They argued plaintiff’s claims were premature because it failed to make written demand on Valor, Hopkins, or their predecessors. Alternatively, it failed to state a valid cause of action because Hopkins was lessee of record at the time demand was made. The trial court sustained the exceptions.

Prematurity?

The question in a prematurity exception is whether the cause of action had yet to come into existence because some prerequisite condition had not been fulfilled. Indigo/SWN’s objection was that notice was improper. Here is the statutory scheme for a suit for unpaid royalties:

  • Written notice of failure to pay royalties is a prerequisite to the judicial demand for damages or dissolution (R. S. 31:137).
  • After written notice, the lessee is given 30 days to respond (R. S. 31:138).
  • The royalty owner has remedies if the failure to pay was because of fraud or was wilful and without reasonable grounds (R. S. 139).
  • If the lessee pays within 30 days, dissolution is not available. If the lessee fails to pay or inform the lessor of a reasonable cause why he didn’t pay, the court may award damages of double the amount of royalties due and attorney fees (R. S. 31:140).

Indigo/SWN became sublessee of the lease on August 1, 2019, and was sublessee when the demand for royalties was made. Because Smith Logging did not send the demand to Hopkins and Valor, notice of cancellation was not effective against them.

A sublessee becomes responsible directly to the original lessor for performance of the lessee’s obligations. Thus, as of August 1, 2019, as sublessee Indigo/SWN was responsible directly to Smith Logging for performance of its lease obligations.

Notice and demand to Indigo/SWN was sufficient. The trial court erred in sustaining the exception of prematurity.

No cause of action?

A no cause of action exception is tried on the face of the pleadings. All well-pleaded allegations of fact are accepted as true and correct and doubts are resolved in favor of sufficiency of the petition. The petition alleged facts sufficient to state a cause of action against Indigo/SWN.  The district court erred in sustaining this exception.

* At some point Indigo was acquired by SWN Production (Louisiana) LLC; hence “Indigo/SWN”.

Your musical interlude.

Precious little legal analysis is required to grasp the lesson from Springbok Royalty Partners v. Cook.  No mode or manner of legal gymnastics is likely to save parties from the legal effect of a contract they didn’t bother to read before they signed it.

The agreement

Following a lengthy conversation between the Cooks and a Springbok employee, the parties agreed to a price for the sale of the Cooks’ minerals and signed a letter agreement entitled “Offer to Purchase Mineral Interests in Lands”. Springbok made a cash offer of $575,000 in consideration for a mineral deed for all of the right, title and interest they held and/or owned in and to 111 net mineral acres under land in DeSoto Parish, Louisiana.

The agreement included language to the effect: It would form a binding agreement; the Cooks would be deemed to have received good, valuable and sufficient consideration for their execution and delivery of their counterpart of the letter and performance of their obligations thereunder; they would not take a position to the contrary; if they signed the agreement they would be obligated to execute and deliver a mineral deed covering all their interest in the property.

The suit

Springbok sued the Cooks to enforce the letter agreement. The Cooks refused to conclude the sale after receiving a better offer. Summary judgment in favor of Springbok was affirmed.

The Cooks’ summary judgment affidavits testified that they thought they were selling half of their interests and that they never intended to sell the entirety. They also testified that they did not read the agreement prior to signing it.

The Cooks’ futile arguments

The contract was ambiguous:  The agreement was clear and explicit and led to no absurd consequences. It unambiguously stated that they were selling all of their mineral interests. When Mr. Cook read the contract two days after he signed, it became clear to him then that they had sold the entirety of their interests.

Unilateral error: Consent may be vitiated by error, fraud or duress only when it concerns a cause without which the obligation would not have occurred and that cause was known or should have been known to the other party. Unilateral error will not vitiate consent to a contract unless the error was inexcusable.  The Cooks were sophisticated landowners who had previously executed leases and engaged in other complicated property transactions.

Fraud:  The Springbok employee knew or should have known that their intent was to only convey half of their minerals. Fraud does not vitiate consent where the party against whom the fraud was directed could have ascertained the truth without difficulty, inconvenience or special skill. The record showed no evidence of fraud.

Accounting was error. because Springbok did not plead for it. The trial court had discretion to allow enlargement of the plaintiff’s recovery to conform to the evidence. The final judgment must grant the relief to which the party whose favor it is rendered is entitled even if the party has not demanded such relief in his pleadings and there is no prayer for general and equitable relief.

New Orleans’ own Walter “Wolfman” Washington RIP

Anita Pointer RIP

We’ll end the year end with a look at “COP27”, the all-expense-paid shindig that was the 27th United Nations Climate Change Conference of the Parties, featuring exaggerations, hysteria, and outright misstatements burning with greater intensity and frequency than their beloved climate itself.

Before you decide who to trust, remember who says they “own the science”.

Conservation for thee but not for me

A reported 400 private jets made their carbon-spewing way to a luxury resort in Egypt to again pronounce the fiery demise of Mother Earth. This is just fine with the BBC because the work of saving the planet is much more important than anything you do.

A word from our sponsor

Get your Greta Thurnberg thermostat!

Crying “wolf”

U.S. warming could be exaggerated by 50%, says Watts Up With That!, citing sources.

Chicken Little speaks

Mainstream media, including my own overmatched Dallas Morning News, succumbs to hysteria from the Associated Press. “Act Now or Die!” … as in, give them lots of money!

Your legitimacy is in question when University of Colorado Boulder scientists worry about mental health crises in youth because of climate change catastrophism.

Pinocchio speaks

Blame the Morning News for being understaffed. The Seattle Times, though, censors “disinformation” and issues demonstrably false “information” of its own.

According to Heartland Institute, a new poll casts considerable doubt on the “97 percent consensus” among scientists about climate change.

Reality speaks

The problem, says Matt Ridley in Not Alot of People Know That, is that green zealots are threatening real conservation.

According to Dan Eberhart in Forbes, the delusion is that alternatives can carry the day. We will need fossil fuels for a long time.

And by some accounts the Polar Bears are doing fine.

Closer to home, and to your wallet and our energy security, Alex Epstein exposes 12 myths about the “Inflation Reduction Act” .

Grifting speaks

Ignoring the life-changing benefits of fossil fuels to their standard of living, less-developed countries trolling for free cash are hard at work to appropriate your taxes, and they are enabled by our enerzy czar and COP27 delegate. What’s the over/under on the kleptocracy quotient? Half, … most? How about politically driven, crony-directed misspending?

Your musical interlude

Authors Chris Davis and Joshua Smeltzer

Originally Published by the Texas Lawbook.

Cryptocurrency is in the news of late. Its relationship with Texas energy is significant. As reported by Ryan Dusek and Cooper Ligon at Opportune.com, its because of our abundant energy supply, a mix of oil and gas and renewables, and good government policy.

With that in mind, here is a report by my Gray Reed colleagues that describes the larger cryptocurency phenomena. It is longer than our usual posts but well worth the read.

Blockchain and its related cryptocurrencies were intended to upend a financial system completely reliant on trusted intermediaries. Starting in 2021 the adoption rate of cryptocurrencies skyrocketed. However, most of these new adopters are not making use of the underlying blockchain technology and instead interact with cryptocurrencies using a variety of mostly unregulated intermediaries, including exchanges like FTX.com.

Trust has, therefore, been reinserted for millions of users into a system designed to eliminate such trust. Where trust is required, trust can be abused. And the news is littered with examples of cryptocurrency investors losing money at the hands of these intermediaries.  

Stablecoins appeared to be anything but stable when the Terra network and its algorithmic stablecoin (i.e. a digital asset collateralized by calculations instead of independent reserves of actual dollars) failed. Investors who didn’t understand these types of “stable” coins suffered when the calculations failed. Then the drop in cryptocurrency prices started to expose mismanagement and other risks in many other cryptocurrency companies (e.g. Celsius, Voyager and Three Arrows Capital). Sam Bankman Fried (SBF) and his FTX exchange became the latest very public example— admitting an inability to account for billions of invested capital and filing for bankruptcy. It will take time before the entire impact of the FTX failure and bankruptcy is known. However, here are five things for investors to take away from the recent events involving FTX when considering the future of digital assets. 

1. Beware the cult of personality.

FTX’s explosive growth was driven largely by the popularity of SBF himself and a roster of celebrity promoters—including Tom Brady, Giselle Bündchen, Steph Curry and Shaquille O’Neal. Perhaps most notably, Larry David appeared in a Super Bowl ad touting FTX as a “safe and easy way to get into crypto.” FTX also bought naming rights to the Miami Heat’s basketball arena, which in the eyes of many lent additional credibility to the company. SBF himself shamelessly promoted FTX—for instance, sitting for an “exclusive” CNBC interview in which he discussed surviving the “Crypto Winter” and his purportedly unique investment strategy. This interview aired less than a month before FTX collapsed. If this type of over-the-top promotional strategy conjures up memories of past frauds, it should. Remember Enron Field in Houston? The Stanford-St. Jude Championship and Allen Stanford’s ties to many notable professional golfers? Elizabeth Holmes “firing back at doubters” on CNBC, while popular “Mad Money” host Jim Cramer described her company Theranos as “one of the most exciting privately-held companies in Silicon Valley”?

Fraudsters know that investors are wowed by TV appearances, corporate sponsorships and celebrity endorsements. But TV commentators, corporate marketing departments and celebrities are not vetting these companies. If anything, these parties are blinded by sponsorship dollars or the competition to land an interview with “the next Steve Jobs” (as Holmes was described). And while the SEC’s recent wave of enforcement actions against celebrity crypto promoters like Kim Kardashian is a good message to the market, average investors continue to be fooled. The FTX fraud reinforces the need for skepticism and diligence.

2. Invest in a business, not a cause.

SBF was a major proponent of a movement called “effective altruism.” This philosophy dictated that the end game of SBF’s and FTX’s success was not their own wealth—but rather using that wealth to do good. To wit, SBF pledged to eventually donate substantially all of his net worth to charitable causes. This messaging dovetailed perfectly with much of the philosophy behind the development of cryptocurrencies—in which proponents advocated the “democratization” of the financial world, as power would be decentralized rather than concentrated in powerful financial institutions. Consequently, money poured in from those looking to not only profit, but to do good in the process.

Unbeknownst to these investors, rather than doing good with their money, SBF was misappropriating it to buy himself, his family and his friends 19 Bahamian properties worth roughly $121 million. This reinforces the fact that someone bent on fraud is not above lying about alleged charitable intentions. The FBI, IRS and other agencies for years have warned the general public about those who tug at the heartstrings of their victims in order to get them to part with their money. SBF’s version of this tactic was just more brazen and more public.

The bottom line is that investment decisions should be based first and foremost on the underlying business—not its good intentions. These purported good intentions may just be a vehicle to hide fraud.

3. Garbage in = garbage out.

The FTX exchange, and many other cryptocurrency exchanges, are not really decentralized. For most of the recently failed or bankrupt companies, there is a centralized group of managers interacting on behalf of investors with the actually decentralized networks. Therefore, it is the quality of these managers and their companies, and reserves on hand to protect investors, that must succeed and not the blockchain network used or the associated cryptocurrencies unconnected to the company.

Multiple commentators have indicated that FTX was horribly mismanaged and its books were beyond inaccurate. Including, as mentioned above, misplacing billions of dollars. The amounts invested don’t matter if the exchange, as FTX claims, can’t find and return the money invested when asked. There were advisors and accountants involved, but it didn’t appear to matter. There were little to no internal controls, the apparent outside controls of auditors also failed, and there were no regulatory reporting or other compliance requirements that might have signaled a problem. If the investment is going into a faulty company with a faulty system, it has very little, if any, chance of success.

Customers and legislators are almost guaranteed to demand more of the digital asset companies and exchanges going forward. This will likely require proof of adequate reserves and more public disclosure and reporting to both oversight government agencies and investors.

4. Compliance is a good investment.

The collapse of FTX has ushered in a significant change in dialog within the cryptocurrency community. After years of antagonism towards regulators (a two-way street, to be sure, as many regulatory agencies have been likewise antagonistic towards the industry and unfairly painted it with a broad brush), many within the community are now acknowledging that regulation could be a good thing. And whether it’s a good thing or not, it’s coming. FTX’s collapse has, predictably, led to calls for tighter regulation.

This reinforces that compliance is a good investment and a potential competitive differentiator. For instance, Coinbase stands out as a cryptocurrency exchange that has taken a markedly different compliance approach from FTX. Coinbase is a U.S.-based, publicly traded company. This requires it to comply with SEC and NASDAQ rules and regulations, to provide audited financials to the public, etc. This is not to say, of course, that every cryptocurrency or blockchain company can or should go public. These companies should, however, ensure that they have made the investment needed to both understand and meet certain compliance obligations demanded by the government and/or their investors. This will not only keep them out of trouble but also set them apart from their competitors.

5. Blockchain and digital assets will survive.

Bitcoin has a history of being discounted as a fad and has been pronounced dead multiple times. However, it always seems to survive, and the failure of specific digital asset companies are unlikely to be the demise of Bitcoin and other digital assets.

The blockchain technology, the networks employing that technology and the associated cryptocurrencies are built to be trustless, and they remain trustless. The blockchain technology and its underlying cryptocurrencies provide something that millions of new users flocked to in 2021 and are still adopting, albeit at a slower rate. There is clearly a demand. The intermediaries failed, not the blockchain networks.

In an ironic twist, the failure of centralized cryptocurrency intermediaries further supports the need for the actual decentralized financial exchange system. What users need is an easier way to access the actual blockchain network without the need for intermediaries acting on their behalf. Access to the actual blockchain system remains remarkably difficult for an average user, and that’s how intermediaries flourished and recruited customers by offering a user-friendly way to invest.

However, as a new innovation, it will hopefully become easier to access and use as the technology develops. Then users will not need to rely as heavily on outsiders to act on their behalf.  

FTX, mostly because of its penchant for publicity, is a very public failure, but it is not the entire blockchain and digital asset ecosystem—it’s just one piece. Investors must be careful but shouldn’t necessarily give up entirely on blockchain and digital assets because of recent events. Instead, they should demand more business and compliance formalities common in other industries to ensure that the risks involved are adequately disclosed and considered. Investors should also demand more protections, accountability, and punishment for companies acting on their behalf.

There will always be risks, but risks can be managed if the company and the investor deal in good faith with knowledge and understanding of all the facts. That should be the goal going forward.

Musical interludes, your choice

Christmas

Advent

Let’s begin with some Texas law on what a seller sells when he executes a deed:

Generally, a Texas real property deed will confer upon the grantee the greatest estate as the terms of the instrument will permit. This “greatest estate …” differs in concept from the “greatest estate possible”.

A deed will pass whatever interest the grantor has in the land unless the deed contains language showing a clear intention to grant a lesser estate.  Such a clear intention can be accomplished by withholding part of the estate by express reservation or by granting only the portion the grantor desires to convey.

Translation: you’ve got to read the entire document to know.

So said the court of appeals in Mark S. Hogg, LLC v. Blackbeard Operating LLC.

The facts

1994 the Hoggs granted an oil and gas lease on a 160-acre tract in Winkler County to Three-B. In 1998 they granted a lease on 120 of those acres to Three-B. Three B assigned several leases to Stanolind. The granting clause transferred all identified “properties and assets” and then defined 10 “Assets” in eight subparagraphs:

(a) Leases and Lands; (b) Wells; (c) Units and Properties; (d) Contracts; (e) Surface Contracts; (f) equipment, machinery, fixtures and other intangible personal property and improvements on the Properties; (g) oil, gas and condensate and other minerals produced from the Leases, Lands Wells; and (h) Records.

References were made to Exhibits A and A-1. Exhibit A named the 1994 lease and others but did not name or include the 1998 lease. However, Exhibit A-1 named the Hogg #2 Well, which was located on the 1998 lease.

The 1998 lease was assigned to Blackbeard by a Stanolind successor via an assignment that expressly identified the 1998 lease.

The contentions

Hogg claimed that the Stanolind-to-Blackbeard assignment did not include the 1998 lease. Blackbeard sued Hogg for trespass to try title and to quiet title in the disputed interest in the 1998 lease and for declaratory judgment; Hogg counterclaimed for the same relief. The court granted Blackbeard’s motion for summary judgment.

On appeal, Hogg alleged that the Stanolind-to-Blackbeard assignment did not convey the 1998 lease, that the conveyance language limited “Leases” to those specifically defined; alternatively, the assignment could not have conveyed the unnamed lease when A-1 merely identified the name of a unit.

The result

Blackbeard prevailed. The court examined each category of Assets in the eight subparagraphs (too much detail to discuss here). The Court determined that the subparagraphs made clear that the assignor intended to transfer all the interests in the Assets described.

The question still remained whether the 1998 lease was included as an “Asset”. It was. Nothing in the granting clause or Exhibit A precluded other leasehold interests from being conveyed by some additional provision.  By describing the Lands as including the acreage covered by the 1998 lease, the definition of “Lands” in subparagraph A included all of the assignor’s interest in the 120 acres covered by the 1998 lease. And there was sufficient language in subparagraph C conveying all “leasehold interests …. “ to include the 1998 lease.

Further, the court concluded that the assignment satisfied the statute of frauds requirement that a conveyance must contain a valid legal description of the land to be conveyed with reasonable certainty. The assignment satisfied this requirement by referencing recordation information in the Real Property Records of Winkler County.

Your musical interlude, a harmonica blow-off. Pick your winner.

Sonny Boy

Kim Wilson

Kitty (or maybe Daisy) and Lewis

Paul Butterfield

Co-author Brittany Blakey

Wagner v. Exxon Mobil Corporation is an example of the misfortune that can befall the purchaser who assumes the burden of comprehensive, one-sided indemnity obligations. We will disregard evidentiary and other issues in this case and will focus on indemnity.

The parties executed an Agreement to Purchase and Sell in 1994 whereby the Wagners acquired oil and gas interests in Louisiana from Exxon. In a corresponding Assignment, Exxon conveyed a 50% interest in a mineral servitude encumbering over 120,000 acres.  The Wagners agreed to indemnify Exxon for what looks like every environmental liability a diligent scrivener could imagine.

The parties were sued for environmental contamination and for remediation of the properties in two Louisiana lawsuits: M.J. Farms, and Agri-South. The cases settled and Exxon sued the Wagners for indemnification, and after trial sought judgment on a jury verdict for $57.5 million paid to M.J. Farms and $14.1 million paid to Agri-South. The Wagners sought a directed verdict in their favor on both settlements.

The trial court granted the JNOV motion in part, reasoning that Exxon “clearly received valuable consideration in the settlement in the form of collateral transactions for which the [Wagners] had not indemnified Exxon[.]” Exxon failed to prove “an allocation of the [M.J. Farms] settlement between non-indemnity consideration and indemnified losses.” The trial court disregarded the jury finding in part and determined that only $14.11 million of the M.J. Farms settlement “should be considered applicable to the indemnified claims.” The judgment awarded Exxon $14.11 million for each settlement. Both parties appealed.

The appeal and the result

Essentially, the Wagners asserted that Exxon’s failure to allocate the M.J. Farms settlement between those benefits that were covered by the indemnity agreements and those that were not was fatal to a recovery. In response, Exxon pointed to Wagners’ failure to timely object to the jury charge and to raise res judicata as a defense. (Trial lawyers, pay attention!)

In the PSA and Assignment the Wagners agreed to:

  • indemnify Exxon ” … from and against all damages … as a result of … the ownership or the operation of, or any act or omission in connection with, the interests or property, by buyer, … or by Exxon, … including, but not limited to: … claims, [etc.] arising out of, or in connection with, the plugging and abandoning and reabandoning of any wells, … closure of pits, and restoration of the surface, … [.]”
  • accept all liability for the environmental condition of the property, including “… all existing and prospective claims, … including … costs to cleanup or remediate … and … to indemnify, defend, and hold Exxon … harmless from any and all claims … and liabilities whatsoever in connection with the environmental condition of the property … [.]”
  • indemnify Exxon for claims “on account of … contamination or threat of contamination of natural resources … or other threat to the environment” arising from operations before or after the PSA’s effective date.

The court determined that these provisions obligated the Wagners to indemnify Exxon for damages, losses, and expenses:

(1) as a result of the Wagners’ ownership of or any act taken on the properties;

(2) arising out of the “closure of pits, and restoration of the surface”;

(3) arising from the property’s environmental condition, including “costs to cleanup or remediate”; and

(4) sought by any person on action of contamination of natural resources.

The court concluded that all costs related to the settlement of the M.J. Farms litigation likely fell within the scope of the Wagners’ indemnity obligations.

The trial court erred in disregarding the jury’s finding with respect to the M.J. Farms settlement. Trial court judgment reversed, jury’s verdict reinstated, case remanded for entry of judgment in accordance with the verdict.

THE COURT’S WEBSITE REPORTS THAT THIS OPINION HAS BEEN WITHDRAWN.

Christine McVie, RIP.

The Kingfish would be proud of the Louisiana Supreme Court in Louisiana Ex Rel Tureau v. BEPCO, L.P. et al. The issues were the prescriptive period applicable to a citizen suit for injunctive relief under R.S. 30:16 and whether the petition stated a cause of action under R.S. 30:14 and 30:16. The court held that a 30:16 citizen suit is not subject to liberative prescription of any duration and, insofar as the petition accused the defendants of violating Louisiana conservation laws, rules, regulations or orders, the allegations were sufficient to defeat an exception of no cause of action. The common man wins … for now.

The Court relied on the environmental protection provisions of Louisiana Constitution Art. IX, §1. It was up to the legislature to set forth procedures to ensure that damage to the environment is remediated to the standard that protects the public interest. The legislature established the Louisiana Office of Conservation to oversee and enforce conservation laws. The Commissioner of Conservation has a duty to restrain any person who is violating or threatening to violate conservation laws. Should the Commission fail to honor its duty, 30:16 authorizes any person in interest adversely affected by the violation to institute proceedings to prevent further violations. 30:16 does not allow for recovery of damages by the citizen.

Tureau’s claim was that the defendants operated numerous wells on his property or adjacent property and constructed and used unlined earthen pits that were either never closed or not closed in conformance with environmental rules and regulations, in particular Statewide Order 29:B.

Liberative Prescription

On the defendants’ exception raising the objection of one-year liberative prescription under Civil Code Art. 3492, the Court noted that the State of Louisiana is the real party in interest in these cases. A request for injunctive relief differs from a suit for property damages and for the remediation of contamination, which has a one-year prescriptive period.

Statutes on the subject cannot be extended from one action to another, nor to analogous cases beyond the strict letter of the law. The Court noted that the legislature has not enacted a specific liberative prescription statute applicable to claims for injunctive relief under 30:16.

Defendants’ effort to apply the one-year prescription by analogy failed. The Court noted that citizen suits to enforce environmental regulations pertain to fundamentally different public law matters and are nothing like private tort claims. Relief is limited to injunctive relief, and a notable distinction of a 30:16 action is that the citizen is essentially acting for the Commissioner. Clear language of the statute authorizes a person in interest adversely affected by a violation of Louisiana’s environmental laws to bring suit to prevent any or further violations. The Court concluded that the statute is narrowly tailored to serve the best interest of the public and is not intended to provide a citizen with a private personal action for damages.  

No cause of action

The court denied defendants’ no cause of action exception based upon the cessation of operations on the property years ago. The question is whether, considered in a light most favorable to the plaintiff, and with every doubt resolved in the plaintiff’s favor, the petition states a valid cause of action. Tureau’s petition alleged that the property had been contaminated as a result of oil and gas activities and that the defendants were currently in violation of Statewide Order 29:B and other regulations.

Defendants argument that their failure to remediate contamination to the minimum required standards does not in and of itself constitute a violation of laws, regulations, or orders goes to the merits of plaintiff’s claims and not the sufficiency of the pleading.

The failure to remedy past contamination and comply with regulations can constitute a continuing violation. The Court denied defendants’ argument that only violations involving present, ongoing conduct or threatening future conduct give rise to a citizen suit under 30:16.

Your musical interlude

Let’s proceed directly to the takeaways from Fort Apache Energy, Inc. v.  Short OG III, Ltd., et al, a Southern District of Texas bankruptcy district court opinion. (Gray Reed partners Jim Ormiston, Gabe Vick and Kristen Kelly represented Short OG III)

The other guy’s operations will not extend your lease beyond the primary term.

Texas law does not allow an oil and gas lessee to rely on a cotenant’s production to extend the term of the lease. Fort Apache and Short et al owned competing leases on 112 acres in Tyler County. The Southern Star lease expired because Fort Apache did not operate on the land during the primary term and could not rely on its lack of operations to extend the lease. Fort Apache testified that it was not economically viable to drill its own well on already developed land and it had no intention to develop the lease. The fact that an operation is uneconomical is not a reason to justify a lack of production. As cotenant Fort Apache had equal rights and access to produce.  

If you sue me, I have standing to assert lease expiration

Fort Apache argued without success that Short et al lacked standing to challenge a motion for summary judgment on expiration of the Southern Star lease because they were not third-party beneficiaries or contracting parties. Their standing was derived from their defense against Fort Apache’s trespass claim.

No trespass by a cotenant

A cotenant has the right to possess land to extract minerals and only owes an accounting of the proceeds less reasonable costs in production and marketing. Short et al, as owners of a competing lease, did not trespass because they were cotenants. Fort Apache’s trespass claim failed because it did not offer evidence to show that Short et al dispossessed it from the land.

Reliance on repudiation?

A lessee who never intends to drill a well cannot rely on its lessor’s repudiation of an oil and gas lease.

Background

In this limited space I will try (sub-optimally) to do justice to the maze of facts and events behind this ruling. Let’s just say, generally speaking, the following happened:

Hranivitz, Sr. and McBride each owned half of the land and signed competing leases. People died. Their descendants and successors signed some leases and ratified others, some with authority and some without, some timely and some not. More people died, leading to a legal tug of war over who had legal title to the property and the right to dispose of it: the administrator of the estate or the testamentary trustee?

Fort Apache sued alleging seven assorted causes of action: Short et al counterclaimed.

Working interest owner (with Short et al) Aztec filed for bankruptcy. The working interest owners’ counterclaims and third-party claims are still pending in a baknruptcy adversary proceeding.

The Bankruptcy Court issued an opinion that the Southern Star lease was superior to the Miller lease and ratification of the Miller lease was void, but at the time the prevailing lease might have expired.

Conclusion, for now

Short et al’s claim for expiration of the Southern Star lease prevails. Because Fort Apache never conducted operations on the lease after trying and failing to negotiate a joint development agreement with Short et al., the lease expired. Fort Apache’s partial summary judgment motion on trespass is denied.

*

Your musical interlude.