Co-author Caleb White

After reading Devon Energy Production Company, L.P. v. Oliver if you’ recall a similar post-production cost dispute, it was last week. And the result was the same. Royalties under this lease are to be calculated at the wellhead (where there are no PPC’s) and not on a downstream market price (after PPC’s are incurred).  

The Facts

The Olivers are royalty owners in two leases covering over 3,700 acres in Dewitt County from which 110 oil wells produce. The leases contained a royalty provisions in the form and in the addendum. The addendum controls where the two are in conflict. The Olivers attempted in several ways to free themselves from the burden of PPC’s.

  • Form lease Paragraph 3: Lessee, at its option, will pay lessor “ … the average posted market price of such 1/5th part of all oil at the wells as of the day it is run to the pipe line or storage tanks, lessors interest, in either case, to bear 1/5th of the cost of treating oil to render it marketable pipe line oil …. “ (emphasis ours).
  • Addendum Paragraph 15: The lessor’s royalty on hydrocarbons shall never bear, directly or indirectly, any portion of the costs to save, store, gather, transport, treat, process, refine, manufacture, or market hydrocarbons, or the costs to construct, repair, or operate any related plant or facilities, or “any other costs or expenses whatsoever …,”
  • Addendum Paragraph 38:  Lessor reserved the right to take royalty oil in kind at the wells, … pending such election, the lessee shall purchase or market the lessor’s oil “at a cash price equal to the market value on the day of sale.”
  • Addendum Paragraph 35: All royalties are to be 20% of all oil and gas produced.

The Olivers sued alleging that Devon breached the leases by underpaying royalties. They argued that the free of “any other costs or expenses whatsoever” language in Addendum 15 superseded and eliminated the “at the wells” valuation point in Form 3. Devon responded that the addendum’s free-of-costs language did not establish a new valuation point. Therefore, the “at the wells” designation remained unchanged.  

The trial court granted summary judgment for the Olivers; the royalty interest was not valued “at the well” and the correct formula was “one-fifth of market value … on the day of sale.” After a trial on damages, the jury, obeying the judge’s erroneous instruction, awarded the Olivers $15,800,937.

The Analysis

The Court of Appeals began by citing the three components of any royalty clause:

  • a royalty fraction,
  • a yardstick (the pricing mechanism), and
  • a valuation point (the location at which the yardstick is applied).

Applying the reasoning of the Texas Supreme Court’s 1996 opinion in Heritage Resources, Inc. v. NationsBank, the Court concluded that the PPC language was mere surplusage when applied at the wellhead valuation point because no PPC’s are incurred at the well.

The default rule that royalties are free of production costs but not PPC’s is freely modifiable by the parties. The Court noted the leases did not specify an additional payment model to be remitted “in addition to” the royalty payment specified at the well; nor did they draft around Heritage. HINT to drafters: Heritage can be defeated by those who are paying attention.

Addendum 38 addresses only the yardstick (“market value”) and the lessor’s right to take in kind. Its silence on the valuation point does not render it in conflict with Form 3’s “at the wells” language.

Addendum 35 provides a royalty percentage of 20%. While under Addendum 15 the royalty shall not bear PPC’s, it does not establish a different valuation point. Accordingly, it merely supersedes and replaces the language in Form 3 that follows the valuation point language.

The Result

The Court determined that the leases established an “at the wells” valuation point, and the addendum’s PPC language did not create ambiguity or move the valuation point downstream. The jury award was improper because the damages were based on the downstream price, where crude oil is most valuable. The Court reversed and remanded for further proceedings.

Your musical interludes. Instruments only today. You have your folk music,… your Cajun ,,, your Appalachian … your African … your blues … your Irish … your Scottish …

You might know Plaquemines Parish, Louisiana, for ’60’s political boss-segregationist Leander Perez. or maybe for its role in launching Huey Long’s political career after the New Orleans city fathers blew a hole in the levee in order to save the Queen City from the 1927 flood. (The Kingfish would go on to terrorize out-of-state oil companies until he was assassinated in 1935. You can still see marks from the shots that missed in the marble walls of the state capitol building.)

Now, the parish that separates New Orleans from the Gulf of MAGA is back in the news. Dozens of lawsuits against oil and gas companies under Louisiana’s State and Local Coastal Resources Management Act will be impacted by Chevron USA v. Plaquemines Parish, Louisiana, SLCRMA creates a cause of action against parties that use Louisiana’s coastal zone without required permits. Louisiana parishes allege that the companies’ operations have caused extensive land loss and damage to Louisiana’s coastal wetlands. The decision broadens the scope of federal officer removal available to private contractors.

The exemptions

SLCRMA’s grandfather clause exempts from the permitting requirement specific uses legally commenced or established prior to the 1980 effective date of the program. The 2018 “Rozel expert report” opined that certain of Chevron’s pre-1980 oil production activities were not lawfully commenced because they did not comply with prudent industry practices at the time, thus denying those companies (to-wit Chevron) the exemption and placing WWII-era conduct at issue. Examples of the challenges to Chevron’s production activities are failure to use steel tanks instead of earthen pits, its use of vertical-drilling methods, and use of canals instead of roads.

Federal officer removal
The federal officer removal statute  authorizes removal to federal district court of any civil action or criminal prosecution commenced in state court against “any officer (or any person acting under that officer) of the United States or of any agency thereof, in an official or individual capacity, for or relating to any act under color of such office.” In interpreting the statute the Court held that Chevron’s World War II-era crude oil production in Plaquemines Parish’s coastal zone “related to” Chevron’s performance of its federal contract to refine aviation gasoline for the U.S. military during that time, thereby satisfying the “for or relating to” requirement of the statute.

After Chevron removed the case, the federal district court (and its Western District counterpart in Cameron Parish v. Apache) granted the parishes’ motion to remand, ruling that even though Chevron and other vertically-integrated companies had federal avgas refining contracts, those contacts said nothing about how defendants were to obtain crude oil. They could purchase it on the open market, for example. Thus, crude oil production activities were not sufficiently “connected or associated with” the refining activities.

The Fifth Circuit consolidated the appeals and affirmed, holding that the “connected or associated with” element was not met for two principal reasons.

  • The refining contracts gave defendants complete latitude to forego producing any crude and instead buy it on the open market, so crude production was not directed by the contract, and
  • The Petroleum Administration for War’s (PAW) crude oil allocation system—under which the federal government, not the companies, determined which refineries received which crude—severed any connection between Chevron’s production and its refining operations.

The “relating to” standard

The Supreme Court read “relating to” broadly, to mean “to stand in some relation; to have bearing or concern; to pertain; refer; to bring into association with or connection with”. The Court noted that one thing can relate to another even if the connection is “indirect”; even if it was “not specifically designed to affect” the other; and even without a “strict causal relationship”. A removing defendant need not show that its federal duties specifically required or strictly caused the challenged conduct. The Fifth Circuit’s approach was too narrow.

In finding that the parish’s suit was closely connected to Chevron’s wartime activities, the Court rejected both of the Fifth Circuit’s principal grounds for affirming the remand.

  • The ordinary meaning of “relating to” does not requrre that the defendant show that his federal duties specifically invited his conduce, and
  • An act can relate to its consequences even when the causal chain includes actions by intermediaries.

Plaquemines argued that removal requires the defendant to have been “acting under” a federal officer in taking the specific actions challenged in the suit. The Court rejected this as inconsistent with the statutory text.

The Supreme Court vacated the judgment and remanded the case for further proceedings. Whether the Rozel report carries the day is not the issue at this stage. That question will be resolved in federal court and not the (defendants likely assume) home-town friendly state court just down the river.

Your musical interlude

… and one for Mom

Co-author Caleb White

In Fasken Oil and Ranch, Ltd. v. Puig the Supreme Court of Texas resolved whether a deed conveying a non-participating royalty interest “free of costs forever” relieved the royalty owners from bearing postproduction costs for minerals sold downstream. Under the language in the deed in this case, it did not.

The facts

The Puig’s own an NPRI in a mineral estate located in Webb County reserved in a 1960 deed in which their predecessor in interest sold ranchland to Palafox Exploration Company. Fasken is the successor in interest to Palafox, and operates oil and gas wells on the leaseholds.

The Puig deed provides:

There is SAVED, EXCEPTED AND RESERVED, in favor of [Puig] an undivided … 1/16 of all the oil, gas and other minerals, …  in, to and under or that may be produced from the above described acreage, to be paid or delivered to [Puig] … free of cost forever.

 After Fasken produces minerals from the wells, it transports, treats, processes, and sells them as condensate and natural gas. In calculating the Puigs’ royalty on produced minerals Fasken deducts costs incurred between the wellhead and the point of sale from the price obtained for the processed gas.  

Puig challenged this method of calculation and sought a declaration that their royalty was free of PPCs, and should be based solely on the price obtained on the processed minerals in sales at the downstream market. Puig pointed to the deed language: The royalty was “free of cost forever.” As such, Fasken should be precluded from deducting PPCs prior to calculating the royalty. Fasken responded that Puig’s royalty was calculated based on the value of the gas “produced from the above described acreage”, not a downstream sales price.

The analysis

The Court began with the default rule: Unless the parties agree otherwise, an NPRI is subject to PPCs incurred to prepare the raw oil or gas for sale downstream. The Court noted two primary ways parties may free a royalty interest from bearing PPCs.

  • setting the valuation point of the royalty downstream of the well, or
  • employing explicit terms that add some or all PPCs to the royalty base.

 The Puig deed did neither. The deed described a geographic location: minerals “produced from the above described acreage.” The Court explained that production is the process of bringing minerals to the surface, and production of raw gas occurs at the wellhead. While parties to a deed can set the valuation point and method independently, absent contrary language, a royalty in minerals “produced” and nothing more is a royalty valued at the well.

The Court likened “produced from the above describe acreage” as the functional equivalent of an at-the-well designation. The Court reasoned that this language identified the physical location at which the Puigs’ interest is created, indicating that the royalty interest is in minerals as they come out of the ground, not after PPCs have increased the minerals’ value.

The Court concluded that “free of cost forever” does not change the valuation point or formally relieve the royalty of PPCs. Instead, “forever” merely refers to the temporal duration of the royalty interest. Absent a reference to another valuation point or calculation method in the deed, the cost-free language merely restates the rule that a royalty interest is free of cost incurred in exploring for and producing raw minerals.

The Result

The Court determined that the Puig deed provided for a royalty that is free of costs incurred in exploring for and producing minerals. “Free of costs forever” did not change the valuation point of the royalty interest from the wellhead to the fully processed minerals downstream. Fasken was correct to deduct PPCs from the downstream sales price in calculating the Puigs’ royalty.

David Alllen Coe RIP. He made it famous, remember it was written by the late great Steve Goodman.

Way back in 2023 it was predicted that the Supreme Court of Texas’ decision in Van Dyke v. Navigator would spawn years of litigation. How right the predictions were!

In Boren Descendants and Royalty Owners v. Fasken Oil and Ranch, Ltd,, consolidated with Mabee Ranch Royalty Partnership v. Fasken Oil and Ranch Ltd., the Court granted petitions for review of a single judgment from the 11th Court of Appeals and returned the cases to the 11th court.    

As the supreme court reiterated recently in Clifton v. Johnson, in instruments granting or reserving a royalty expressed as a double fraction, there are two distinct paths to establish ownership of the interest: Construction of the original deed and the presumed grant doctrine. These cases implicate both paths. The 11th Court reviewed only the deed construction path.

At issue is a 1933 deed in which Fasken holds an “undivided one-fourth (1/4) of the usual one-eighth (1/8)“ nonparticipating royalty interest. Fasken sued alleging the NPRI floats with current leases and is not a fixed fraction. The trial court granted partial summary judgment for Fasken agreeing there was no evidence that the presumed grant doctrine applied. The court of appeals affirmed, holding that the deed reserved a floating 1/4th NPRI and affirmed as to affirmative defenses of estoppel, waiver, ratification, and limitations, but concluded it lacked jurisdiction to consider the presumed grant doctrine because it was not included within the list of issues the trial court identified in its order permitting an interlocutory appeal. The supreme court reversed the trial court’s denial of Mabee Ranch’s summary judgment motion on Fasken’s cause of action for breach of contract.

The supreme court noted that for 85 years the parties and their successors treated the instrument as reserving a fixed 1/32nd NPRI. Fasken admitted it treated the royalty as fixed during that entire time, it paid taxes on 1/32nd and no greater interest, and it was not aware of its predecessors treating the NPRI as anything other than 1/32nd.

The court of appeals’ concern that its jurisdiction was lacking was misplaced. The presumed grant issue was among fairly-included subsidiary and ancillary issues in the trial court’s order. The essential question in all of these appeals is, who owns this property today? To answer that question the presumed grant doctrine could not be severed from an appeal involving textual analysis of the deed.

Citing Clifton as a clarification of the law, the supreme court reversed the court of appeals’ opinion on jurisdiction, vacated the judgment on the merits, and remanded the cases for a fresh consideration of the merits because that court did not consider the presumed grant doctrine. The parties will be allowed to present Clifton-related arguments to the court of appeals.

Is a fact issue hiding somewhere in this judicial forest that will send the cases back to the trial court for yet another round? We will see. Full disclosure: My Gray Reed colleagues and I represent royalty owners on the losing side.

RIP Dave Mason, Traffic … songwriter, … guitar player

Co-author David Pruitt

Davis v. Aethon Energy Operating LLC is more for lawyers than business people but it is worth noting. A Texas court of appeals affirmed a take-nothing judgment against lessors who sued over the lessee’s failure to provide required information on check stubs. The question asked of the jury did not match the requirements of the statute the lessor was suing under. The court measured the sufficiency of the evidence against the charge as given.

The Facts

Lessors Lud and Charlotte Davis sued lessee Aethon and several related entities. The Davises’ leases required them to bear their portion of post-production costs, including a transportation fee that Aethon-related entity Scona charges for marketing gas.

During 2020, each check stub to the Davises listed the transportation charge as “$0.00.” The Davises suspected Aethon was embedding the fee in the total sales price and concealing the charge through its accounting methods. After an unsatisfying explanation from Aethon’s general counsel, the Davises concluded that Aethon was artificially inflating post-production costs. They sued in March 2021.

Also in that month, Aethon serendipitously changed its accounting practices and began separately itemizing the transportation fee, maintaining the change was unrelated to the lawsuit and was made in order to automate payout calculations for cost-free royalty owners.

The statute

Texas Natural Resources Code § 91.501 requires a payor to include information specified in § 91.502 “on the check stub, an attachment to the payment form, or another remittance advice that accompanies the payment.” Among the required disclosures are “any other deductions or adjustments.”

At trial the jury charge didn’t track the statute. Question Six asked whether Aethon failed to provide the Davises with the information “to which they were entitled each month” — not on “each check stub.” The court held that because no objection was made to the charge, the sufficiency of the evidence was measured by the charge as given, even if it is an incorrect statement of the law.

Under the language in the charge, the jury concluded that Aethon satisfied its statutory duty by disclosing the required information at some point in time other than on the check stub. Thus, an email from Aethon’s general counsel explaining the fee, combined with the fact that the fee was separately itemized beginning in March 2021, gave the Davises enough information from which to calculate the charge for the pre-March 2021 period, and allowed Aethon to satisfy its legal obligations as stated in the question. It probably helped Aethon that Lud Davis was a sophisticated royalty owner who had the information to calculate the fee at least two years before trial.

Bottom line – the jury charge

Questions to be answered by the jury are important. The Davises may have had a strong case under the text of § 91.502, but the jury evaluated the evidence against the question actually posed, not the as-written language of the statute. The evidence was legally and factually sufficient to support the jury’s verdict.

Your musical interlude.

Robert May et al v. Ineos USA Oil & Gas, LLC et al, could, if you are so inclined, serve as a tutorial on terms used in oil and gas transactions or, if you are further along than that, it could be your guide for negotiating and drafting farmouts.  

The agreements between the plaintiffs/farmors and defendants/farmees were sui generis, so this result will not necessarily translate to other disputes. The significance of the decision is the Court’s definition and application of common oil and gas terms. For example: “fee simple determinable”, “possibility of reverter”, “special limitation”, “condition”, “covenant” and “farmout agreement” (our self-imposed space limitations do not allow elaboration).

The facts

Farmees drilled wells under the farmout agreement and farmors executed partial assignments of acreage, retaining a reversionary back-in interest in two leases. The back-in, which excluded assets earned by farmees, was effective at “Payout”. The contractual trigger that could cause lease termination and reversion of undrilled acreage was the cessation of continuous drilling operations.

The issues

After being sued by the farmors, defendant/farmees sought summary judgment raising these questions:

  • Did the contracts convey the leases up-front or merely grant a right to earn property?
  • Which events could trigger lease termination?
  • Were farmees’ contractual obligations covenants or conditions?
  • What method would be used to calculate payout?

Assignment or agreement to assign?

The Court explained that when a farmout agreement requires compliance with conditions before the assignment occurs, the farmout is an “agreement to transfer” after performance. In contrast, a conditional assignment is created when the contract assigns interests that vest immediately, subject to later divestment. Parties are free to do it either way.

The transaction was a conditional assignment of a vested fee simple determinable, immediately conveying the leases to farmee/defendants. There was granting language and a specific effective date. It was not a “drill to earn” arrangement. Immediately upon assignment. Defendants held an immediate, fixed right of present or future enjoyment of the interest conveyed. A carveout for “assets earned” was drafted as an exception to the farmors’ reversionary interest, not an exception to the assignment.

Retained acreage clause – a covenant, a condition, a special limitation?

Breach of a condition results in automatic termination of the leasehold estate upon the happening of stipulated events. Breach of a covenant subjects a breaching party to liability for monetary damages or, in extraordinary circumstances, the remedy of a conditional decree of cancellation.

Both a special limitation and a condition call for termination. A retained acreage provision can impose a special limitation on a general grant of interests only if the language is so clear, precise and unequivocal that a court can reasonably give it no other meaning.

The earned‑acreage/retained‑acreage language operated as a special limitation on defendants’ estate. Upon cessation of continuous drilling operations farmees’ interests in the leases automatically terminates as to acreage not retained or “earned”. This is not a forfeiture and does not require breach or default.

Payout

Under the language of these contracts a well drilled on acreage that had already been earned would not be an “Earning Well” and could not trigger Payout. In arriving at this conclusion, the Court construed the unambiguous terms of the operative provisions of contracts and declined to consider contract recitals.

Parol evidence rejected

The Court denied plaintiffs’ tender of extrinsic evidence, in particular on how the parties interpreted the contracts and the course of performance after execution. A court cannot consider course of performance evidence to interpret an unambiguous contract.

Partial summary judgment granted for defendants.

Unresolved issues

See Opinion p. 6 for questions that were left for another day.

Your musical interludes – angelic voices edition:
Sarah Vaughn

Nina Simone

Joni Mitchell

“Gambit”: A calculated move, a stratagem. An example might be to buy a mineral interest with a long and complicated title history from the incarcerated son of a deceased parent and to bet on a court favoring your characterization of the property. In Griffin Energy Law, PLLC v. Billingsley et al. the gambit failed.

The events and transactions (most of them, anyway)

  • In 1977 Larry and Nickie married.
  • In 1978 Larry and his brother Robert Billingsley acquired adjoining properties in Martin County. Larry acquired the SW/4 and Robert the SE/4 of Section 19. Larry’s deed recited that the consideration for his acquisition was paid with Larry’s separate property funds, Larry would pay off notes burdening the property as though he were the sole owner and sole obligor, and the seller agreed to look only to Larry’s separate property for payment.
  • Larry executed a deed of trust to the seller which stated that the loan secured thereby to Larry as his separate property.
  • By separate mineral deeds Robert and Larry exchanged half of their respective mineral interests in the S/2 of Section 190. The mineral deed to Larry had no separate property recital or reference to separate property consideration. The deed to Robert recited that Larry’s interest was his separate property.
  • Larry executed two oil and gas leases in which he stipulated that he was dealing with his separate property.
  • Nickie participated in unrelated transactions that included no separate property recitals.
  • Larry died with a will, leaving his interest in the SW/4 in trust to Nickie and upon her death to his siblings. Then Nickie died intestate.
  • For more than a decade the Billingsleys paid ad valorem taxes on the minerals in the SW/4 and received royalties on production.
  • GEL acquired Nickie’s interest from her son after her death for $20,000.
  • GEL sued Robert et al for trespass to try title to the minerals in the SW/4.

The “rules”

Texas courts apply established legal principles to resolve disputes over whether property owned by a party to a marriage is separate or community. Among others:

  • A spouse’s separate property, both real and personal, consists of (1) property owned or claimed by the spouse prior to the marriage, (2) property acquired by the spouse during marriage by gift, devise, or consent, and (3) recovery of personal injuries sustained by the spouse during marriage except for recovery a loss of earning capacity during the marriage.
  • Unless otherwise agreed to in writing by both spouses, community property consists of the property other than separate property that is acquired by either spouse during marriage.
  • Generally, characterization of property is determined by the “inception of title ” doctrine: the time and circumstances of the acquisition.
  • Property acquired in exchange for separate property becomes the separate property of the spouse that exchanged the property.
  • Property possessed by either spouse during or on dissolution of their marriage is presumed to be community. This presumption may be rebutted by “clear and convincing evidence”.
  • The primary consideration is the spouses’ intent, as shown by the circumstances surrounding the property’s acquisition.
  • Parol evidence may be used by party to carry his/her burden to rebut the community property presumption.
  •  How a spouse characterizes other property in unrelated transactions has no bearing on whether the disputed interest is separate or community.

Applying these principles to these facts and others, including deposition testimony of Robert, the Court concluded that the Billingsley parties conclusively established their title in the disputed interest as a matter of law. Larry’s apparent carelessness in one instrument did not create a community interest.

Your musical interlude.

Co-author Taylor Hall

Moore et al v. 1789 Minerals Fund I, LP, et al is another Texas decision addressing the effect of a Sheriff’s Deed after a tax foreclosure. Was the deed void for want of a sufficient property description? No, but the trial court will have to construe the document.

The facts

In the 1930s the Moore brothers—O.J., O.R. and Howard—inherited undivided interests in five tracts. O.J. and Howard also jointly owned a separate tract that was partitioned in 1933, resulting in a total of seven tracts. In 1939, the brothers executed a partition deed that severed the surface estate from the mineral estate of the inherited tracts, with each brother retaining an undivided one-third mineral interest. Over time the mineral and royalty interests passed through a series of deeds and inheritances, with ownership mostly concentrating in Obra III.

In 2014 the Harrison Central Appraisal District sued Obra III for unpaid property taxes on his royalty interests. HCAD obtained a judgment and foreclosure sale, resulting in a Sheriff’s Deed in 2017 conveying three royalty interests to Roberts. The deed identified each interest by a HCAD account number, well name, operator, and decimal royalty figure, specifying “ACRES: 0.000” for each.

Roberts conveyed those interests to 1789 Minerals using a broader description than the Sheriff’s Deed, purporting to convey a full 50-acre tract and all mineral interests in a pooled unit.

Meanwhile, Gunner and  Maderet (appellants with Obra) acquired Obra’s remaining minerals, expressly excluding the “wellbore-only interests” described in the Sheriff’s Deed. Thereafter, they learned that Roberts and Caddo (appellees with 1789) claimed title to all mineral interests in the tracts.

Operator Rockcliff filed an interpleader action asking the court to figure it all out.  

The trial court granted summary judgment for 1789 et al, holding:

  • Obra’s cross-claims were barred by Texas Tax Code §33.54(a)(1)’s one-year statute of limitations and
  • The Sheriff’s Deed conveyed all Obra’s rights in the disputed tracts, not merely wellbore royalty interests

Obra appealed.

The question

Did the Sheriff’s Deed convey only wellbore interests or Obra’s entire mineral interests?

Statute of Limitations

Texas Civil Practice & Remedies Code §16.006(a) allows an otherwise time-barred cross-claim if it:

  • arise from the same transaction or occurrence as the original action, and
  • are filed within 30 days of the answer date.

The CPRC authorized Obra’s cross-claims because they were filed within 30 days of his answer to Rockcliff’s interpleader and arose from the same transaction.

Adequacy of the property description in the Sheriff’s Deed

The Sheriff’s Deed was not void. It referenced HCAD account numbers, providing a means to identify the interests with reasonable certainty. But 1789 did not establish its right to summary judgment because Obra’s interpretation that only wellbore royalty interests were conveyed was supported by the property descriptions (“0.000 acres”), HCAD documents and tax statements, and Railroad Commission well identification numbers.

The court noted that Texas law does not require courts to “scrutinize the proceedings of a judicial sale with a view to defeat them.”

Bottom Line

(1) Obra’s cross-claims were timely;

(2) the Sheriff’s Deed was not void because it adequately described the interests; and

(3) genuine issues of material fact precluded summary judgment. The scope of the conveyance was not conclusively determined. The case was reversed and remanded for the trial court to construe the Sheriff’s Deed.

Your (quotidian) musical interludes: working and more working.

We begin our discussion of Cornucopia Oil and Gas, LLC v. Berry et al with a quiz:

“Subject to” means:

  1. Subordinate to, subservient to;
  2. A term that does not limit the scope of a conveyance but instead notifies the grantee of a right or obligation attended to the property;
  3. The USA is captive to the whims and caprices of our president (Thinking Trump? How about FDR?);
  4. Chuck Norris will always kick the bad guy’s butt;
  5. It depends on the context in which it is used;
  6. All of the above.

The takeaway

After being sued by Berry and Davis in Harris County, Texas, Cornucopia asserted a special appearance, which was unsuccessful. Cornucopia consented to personal jurisdiction in Texas under a forum selection clause.

The facts

There were a two agreements, executed by Cornucopia’s predecessor at around the same time, governing the Kitchen Lights Unit in Alaska: a Lease Assignment and an Amended Joint Operating Agreement.  The Amended JOA was “subject” to the Assignment and in the event of conflict, the Assignment would control.

In the Assignment’s forum selection clause the parties consented to jurisdiction in Harris County for “any dispute or disagreement arising under or relating to this Agreement”. In the Amended JOA’s forum selection clause the parties consented to jurisdiction in New Castle County, Delaware, for “any dispute or disagreement arising under or related to this Agreement.”  

The Davis parties asserted claims for breach of the Assignment. Cornucopia’s special appearance denied general jurisdiction and minimum contacts with Texas. Davis claimed Cornucopia had consented to personal jurisdiction by virtue of the Assignment’s forum selection clause. Cornucopia alleged it did not consent to jurisdiction under the Assignment because it was not a party to the Assignment, which was executed by a predecessor in interest. Davis responded that Cornucopia consented to the Assignment by executing the Amended JOA, which was subject to the Assignment.

The law

If a party contractually consents to jurisdiction in a particular forum then the typical need to determine whether a defendant has purposefully established minimum contacts in Texas giving rise to either specific or general jurisdiction and whether assertion of jurisdiction comports with fair play and substantial justice is not necessary.

An unsigned document may be incorporated by reference in a document signed by the person or entity sought to be charged. The language used is not important, provided the signed document plainly refers to another writing and indicates the parties’ intent to confer jurisdiction. The court concluded the parties’ agreement was accomplished in both the Amended JOA and the Assignment.

“Subject to”

Cornucopia alleged that the “subject to” phrase in the Amended JOA meant “subordinate to, subservient to, or limited by the referenced agreement”. The court determined that “subject to” can be used in multiple ways and cannot be read in isolation. In another situation the phrase may convey.(Occidental), or “to make accountable, to reduce to subservience or submission.” (Webster’s Third New International Dictionary.) In short, the meaning of “subject to” depends on the context of the use of the language.  The import of the language must be drawn from the surrounding context, particularly when construing everyday words and phrases that are inordinately context sensitive. The court concluded that “subject to” in the Amended JOA incorporated the Assignment by reference.

Going further, even assuming that the term means that the Amended JOA was subservient to the Assignment, the two forum selection clauses conflict. Under the Amended JOA the Assignment’s forum selection clause controlled.

The court declined to consider extrinsic evidence of the parties’ intent because the language was not ambiguous.

The court also construed broadly the terms “related to” and “in connection with” in the forum selection clause. The claims against Cornucopia fell within the clause’s scope.

Your (Easter) musical interlude

Co-author Gunner West

Yes … sometimes. In ConocoPhillips Company v. Totem Well Service, the U.S. District Court for the Southern District of Texas applied New Mexico law to an oilfield indemnity dispute, voiding the Master Service Agreement’s indemnification clause calling for Texas law to govern.

The facts

ConocoPhillips, headquartered in Texas, hired Totem, based New Mexico, to perform well services under an MSA. Conoco drafted, negotiated, and signed the agreement from Texas. Totem negotiated and signed from New Mexico. The MSA said nothing about where the work would be performed. After a Totem employee sued Conoco for wellsite injuries, initially in Texas and then by refiling in New Mexico, Conoco invoked the MSA’s indemnity clause. Totem refused to comply and this lawsuit followed.

The court’s analysis

The provision said this:

The interpretation and performance of this Agreement … , and any dispute or Claim in connection with (i) this Agreement … are governed by and to be construed in accordance with the laws of the State of Texas, except for any rule or law of the State of Texas that would make the law of any other jurisdiction applicable.

The court had already ruled that the parties intended Texas law to govern the MSA, including choice-of-law principles. The question now was whether those same Texas principles would lead to application of Texas law or to New Mexico’s. The answer required the three-part framework based on Section 187(2) Restatement (Second) of Conflict of Laws. To override the parties’ chosen law, New Mexico had to satisfy these three prongs:

  • a more significant relationship to the dispute,
  •  a materially greater interest, and
  •  a fundamental policy that Texas law would contravene.

The elements of the first prong, place of contracting and negotiation. were split evenly, since each party handled its side from home. This factor is “relatively insignificant” when there’s no single location. The Court was unpersuaded by Conoco’s argument the last signature was added in Texas. Because the MSA didn’t specify a place of performance, the court couldn’t give that factor “paramount importance”. The drilling, the injury, and the underlying lawsuit were all in New Mexico. Texas appellate courts have treated the forum of the personal injury suit as the relevant place of performance in indemnity cases. Subject matter overlapped with performance, also favoring New Mexico. Place of business was a draw. Weighed by quality, the contacts favored New Mexico.

The court then considered prong two: whether New Mexico’s interest was strong enough to override the parties’ justified expectations. The court acknowledged that Conoco had strong ground here. The MSA contained express Texas choice-of-law language, an indemnity clause, and an agreement to carry insurance. That combination signaled the parties expected the indemnity to be enforceable under Texas law.  But justified expectations can be overcome when “substantially outweighed” by the other state’s interests. New Mexico enacted its Oilfield Anti-Indemnity Act to promote safety by forcing each party to bear its own negligence. Unlike Texas, which carved out an insurance exception, New Mexico allows no exceptions at all. The court found that New Mexico’s interest substantially outweighed Texas’ interest. Texas’s remaining interest, limited to enforcing one company’s contract after the Texas lawsuit was dismissed, couldn’t compete.

The third prong was straightforward. New Mexico courts have called the Texas anti-indemnity statute “fundamentally inconsistent” with New Mexico policy. Applying the Texas insurance exception would directly contradict New Mexico’s blanket prohibition.

The result

All three prongs satisfied, the court applied New Mexico law and voided the indemnity.

Your musical interlude (the one we intended for last post)