Several weeks ago the Supreme Court of Texas addressed the double-fraction mineral conveyance, reinforcing the “Van Dyke presumption” but not addressing how the presumption could be rebutted or the presumed-grant doctrine. Last week’s Clifton v. Johnson addresses both.

The deed and the suit

The typewritten title to a “Mineral Deed” was crossed out and “Royalty Deed” was handwritten. The deed conveyed

“an undivided one twenty eighths (1/128) interest in and to all the all gas and other minerals in the and under” the land.

Under a separate clause the grantees would receive no bonuses or rentals on future leases, had no authority to sign leases, and would receive  

1/128 (1/16 of the usual 1/8 royalty) under any such new lease

Johnson (successor to the grantees) sued Clifton (successor to the grantors) for a declaration that the deed conveyed a floating royalty. Pre-Van Dyke, the trial court deemed the royalty to be fixed. The court of appeals, refusing to apply the presumed grant doctrine for procedural reasons, reversed – the royalty was floating. The supreme court reinstated the trial court judgment – and its back to fixed.

The presumption is rebutted

The presumption in a double-fraction deed that the royalty floats with the royalty in future leases is “readily and generally rebuttable”. This deed’s plain language rebutted the presumption by showing that the parties used 1/128 as an ordinary numerical value, not as a term of art.

The Van Dyke analysis begins (emphasis by the Court) with the presumption. If textual provisions (whether expressed or structural) illustrate that a double fraction was used, and nothing more, then the double fraction presumption will be rebutted. The deed’s distinct provisions must be harmonized. There was no texturally demonstrative basis in Van Dyke to rebut the presumption.

The deed here contained language in both the granting clause and the future-lease clause that expressly used one 1/128th – the product of two fractions. In the granting clause 1/128th stood alone without an attached double fraction. In the future-lease clause 1/128th was followed by a parenthetical containing two fractions (1/16th of 1/8th) that, multiplied together produced 1/128. The double fraction explained how the parties reached their 1/128th future royalty figure. The court did not give the explanatory parenthetical greater weight than the single fractional product.

The 1/128 figure was read consistently throughout the document. This case was the “photographic negative” of Van Dyke. The operative terms clearly established a textually demonstrable basis to rebut the presumption.  The court considered the 1/128 in the future-lease clause to be a conveyance independent of the granting clause.

If textual provisions (whether expressed or structural) illustrate that a double fraction was in fact used as nothing more than as a fraction, the court will apply it in that way. So, the Court held that the deed conveys a fixed 1/128 future royalty interest.

The presumed grant doctrine

In contrast to the Van Dyke presumption, the presumed grant doctrine is concerned not with textual meaning but with real world developments.  A party pressing the doctrine must establish

  • a long-asserted and open claim, adverse to that of the apparent owner;
  • nonclaim by the apparent owner; and
  • acquiescence by the apparent owner in the adverse claim.

The Court considered the seven decades in which the grantees and their successors received a fixed 1/128th royalty without any dispute. The Court believed that the parties and their predecessors in interest all agree on what the deed required, namely a fixed 1/128th royalty interest, and they paid and accepted royalties in accordance with that interest.

Regardless of the result of textual analysis, if the parties have acted as if the opposite of what the text says were true for such an extended time, then the court will apply the presumed grant doctrine when the requirements are satisfied. 

After discussing the doctrine the court determined that it need not decide whether the Cliftons satisfied the doctrine’s requirements because even if the Court had applied the doctrine the result would be same as the court’s reading of the deed: either way, Johnson is left with a fixed 1/1 28 royalty.

Your musical interlude.

Navigator Group, et al. v. Van Dyke, et al.* is the latest stopover in the journey of the double-fraction mineral conveyance through the Texas courts. The Eastland Court of Appeals rejected challenges to the Supreme Cout of Texas’ 2023 pronouncement in Van Dyke v. Navigator Group (Van Dyke II).

The history

In a 1924 deed, the Mulkeys conveyed property to the Whites. The deed said:

It is understood and agreed that one half of one eighth of all minerals and mineral rights in said land are reserved in grantors … and are not conveyed herein. “

Is the reservation to be interpreted as a mathematical expression, preserving only 1/16th of the minerals, or was the intent of the Mulkeys to reserve one-half of their mineral interests?  

Applying logic known to third graders everywhere, the trial court held that by the plain language of the reservation the Mulkeys reserved a 1/16th interest in the “minerals and mineral rights,” which was affirmed by the Eastland court. In Van Dyke II, the Supreme Court reversed, determining that the Mulkeys reserved one half of the mineral estate. On remand leading to this appeal, the trial court signed a judgment confirming that the Mulkeys’ reservation. In other words, math is out and Van Dyke II stands. The term “one-eighth” was properly understood as a description of the entire mineral estate.   

The “rules”

Before addressing the challenge of the White successors (Navigator, et al.; we will call them White) and why the third graders might have been befuddled, we should revisit the rules of interpretation of antiquated deeds set forth in Van Dyke II and Hysaw v. Dawkins.

  • A court should adopt the ordinary meaning of a word unless otherwise defined in the text and, more specifically, the court should adhere to the meaning at the time of drafting. What did the text of the conveyance reasonably mean to an ordinary speaker of the language at that time?  
  • When a deed describes an interest as a double fraction, the intent of the parties must be determined by a careful and detailed examination of the document in its entirety, rather than by application of mechanical rules of construction that offer certainty at the expense of effectuating intent.
  • In the context of antiquated deeds there were two widespread and related faulty conceptual culprits that worked in tandem to lead parties to use the term “one eighth” other than as a literal eighth.
  • The estate misconception theory reflects the prevalent but mistaken belief at the time that in entering into an oil and gas lease a lessor retained only a one eighth interest in the minerals rather than the entire mineral estate in fee simple determinable with the possibility of reverter of the entire estate. Thus, grantors often mistakenly used the term one eighth to refer to the entirety of their mineral interest.
  • At the time, the term “one eighth” had acquired a special meaning in the context of a standard royalty. Since the use of one eighth royalty was near ubiquitous, the parties would use “one eighth” as a placeholder for future royalties generally without anyone understanding that reference to one eighth set an arithmetic value. This is the historical standardization of the term “one eighth” (a/k/a the “legacy of the one eighth royalty”).

This appeal

White argued that that the trial court misapplied Van Dyke II when it failed to distinguish the reservation of the Mulkey’s royalty (1/16th according to White) from the reservation of the remaining mineral rights (one-half according to White). White conceded that the trial court correctly determined the Mulkeys own an undivided one half of the entire mineral estate. But to maintain consistency with Van Dyke II the trial court should have held that, in addition to one half of the mineral estate the Mulkeys also reserved a fixed 1/16th royalty interest. This is based on the prevalent belief at the time that a royalty interest will always be one eighth, which informs the quantum of royalty the Mulkeys intended to reserve.

The assertion was that royalties should be treated as a separate matter from the right to the remainder of the mineral estate. White argued Van Dyke II treated the estate misconception theory and historical standardization of royalty as distinct and separate issues. Unlike estate misconception, royalty misconception presumes that the Mulkeys believed the royalty was forever one eighth.  By laboring under this misconception, the Mulkeys’ intent was to reserve a fixed 1/16th royalty.  

The Court rejected this reasoning. Van Dyke II held that the Mulkeys hold title to one half of the mineral estate without further qualification. In doing so the court was referring to the entire set of severable mineral rights attributable to one half of the mineral estate, including the corresponding rights to royalties rather than, as White contended, all of the mineral rights except for royalties. There was no severance or carveout of the Mulkeys’ royalty interest from the mineral estate.

The Eastland court affirmed the trial court. The Supreme Court believed that its interpretation of the mineral reservation was also dispositive of the royalties. Moreover, White’s alternative reading failed to harmonize the relationship between the estate misconception theory and the legacy of the one eighth royalty. Those are interrelated concepts that work together toward the same result.

Other theories rejected

In what is possibly the mother of all Hail Marys, the Whites argued that Van Dyke II was wrongly decided by the Supreme Court. On the basis of stare decisis and the law of the case the Eastland court declined the extraordinary step of correcting the court that grades its papers.

The Court declined to consider the presumed grant doctrine (title by circumstantial evidence, a common-law form of adverse possession). Because summary judgment was affirmed on another theory, the Court did not need to address this alternative ground.

*Gray Reed lawyers Jim Ormiston and Gabe Vick represented two of the prevailing parties.

Your musical interlude. The original boogie woogie.

Co-author Gunner West

Slant Operating, LLC and Slant Holdings, LLC v. Octane Energy Operating, LLC, reveals the benefits and purposes of the Texas Business Court in resolving complex energy disputes (such as convincing businesses to abandon Delaware). The parties were presented with three detailed written opinions spelling out the Court’s rulings and the reasons for each.

The facts

Slant Operating and Octane, neighboring operators of wells in the Permian, signed a Letter Agreement exchanging reciprocal waivers of off-lease penetration point objections. Slant Operating waived objections to Octane’s five Green Gables wells. In return, Octane agreed to waive objections to future Slant wells drilled into off-lease penetration points on Octane’s leasehold in exchange for production data. Later, Slant Operating requested waivers for six Gardendale wells in mid-2024. Octane refused and filed objections with the Railroad Commission.

The orders flow from the same defect in the Slant parties’ organizational structure: Slant Operating signed the contract but doesn’t own the minerals; Slant Holdings owns the minerals but didn’t sign the contract. This was bad news for the Slant parties.

Order 1 was a win for the Slant parties on the merits. Octane breached the contract. But Order 2 and Order 3 limited recovery because the entity with the contract right (Operating) had no damages, and the entity with the damages (Holdings) had no contract rights.

Order 1: Liability

Judge Bullard granted Operating’s or motion for partial summary judgment on liability and denied Octane’s competing motion. The Letter Agreement was a valid, enforceable contract, not an “agreement to agree.” The Future Waiver Provision contained sufficiently definite essential terms: Octane must provide waivers for Operating’s future off-lease wells on Octane’s leasehold and Operating must provide production data in return. The court rejected Octane’s arguments that the provision was too indefinite (missing well names, locations, dates), reasoning that future-looking provisions in the oil-and-gas context don’t require that level of specificity. The court also noted that Operating’s partial performance (providing the Green Gables waiver) further confirmed enforceability.

The court rejected Octane’s remaining defenses, concluding,

  • the contract was not unreasonable, oppressive, or absurd (both parties had perpetual obligations);
  • Operating was not required to exhaust Railroad Commission administrative remedies because the Commission has no jurisdiction over private breach-of-contract claims; Octane’s waiver, estoppel, and excuse defenses failed for lack of evidence;
  • Operating’s earlier attempt to purchase Octane’s Section 13 leasehold did not constitute waiver of its contractual right to request waivers.

Bottom line

Octane’s defenses failed; it breached the Letter Agreement as a matter of law.

Order 2: Damages

Octane moved for summary judgment on all three categories of damages plaintiffs sought:

  • lost revenue from the six Gardendale wells,
  • lost revenue from 35 future unidentified wells, and
  • drilling redesign costs.

The court granted in part and denied in part.

  • Holdings (the leaseholder/mineral owner) was not entitled to damages because it was neither a party to nor a third-party beneficiary of the Letter Agreement.
  • Operating could not recover lost revenue for either the Gardendale wells or the future wells because Operating does not own any leasehold or mineral interests. Holdings owns all of the working interest. The court was unpersuaded by Octane’s argument that Operating “feels” the economic harm because it holds Holdings’ treasury account. Custody of another entity’s revenue does not establish entitlement to revenue.
  • Summary judgment on Operating’s drilling redesign costs denied. Operating produced invoices from a Railroad Commission regulatory expert who provided guidance on how to reconfigure the Gardendale wells after Octane’s refusal. This constituted more than a scintilla of evidence of consequential/expectancy damages. Those were foreseeable expenses Octane should have anticipated when it refused the waiver.
  • Summary judgment on reliance damages denied. There was no evidence that Operating incurred expenses in reliance on Octane’s promise before the breach.

The court also struck a late-filed affidavit (filed one day past the November 3 deadline) because Plaintiffs failed to seek leave of court.

Bottom line

The only surviving damages claim is Operating’s drilling redesign costs and related regulatory expenses. All lost-revenue claims are dead. Operating doesn’t own the minerals, and Holdings can’t sue on the contract. This creates a significant damages gap given the $10MM+ originally sought.

Order 3: Third-Party Beneficiary / Jurisdiction

This order addressed whether Holdings (owner of the mineral interests Operating develops) qualified as a third-party beneficiary of the Letter Agreement between Operating and Octane. In resolving four competing motions the Court concluded Holdings was not a third-party beneficiary.

The court rejected three arguments from the Slant entities.

  • All operators inherently contract to benefit their affiliated leaseholders. Good try but such a ruling would impose a default third-party-beneficiary presumption across the industry, violating the well-established Texas presumption against third-party beneficiary status.
  • Reliance on Commission Statewide Rule 86 (governing horizontal drilling applications and requiring notice to mineral owners) failed. Any benefit to the leaseholder under Rule 86 is at best implied and does not reflect the contracting parties’ mutual intent.
  • The “creditor beneficiary” theory failed on three sub-arguments: Holdings’ mineral ownership doesn’t automatically make it a beneficiary of every contract its operator signs. Unity of financial interests between affiliated entities doesn’t override corporate separateness; and a reference to “Slant Energy” in the Letter Agreement’s header/footer doesn’t constitute intent to benefit Holdings.

The court sustained Octane’s plea to the jurisdiction and dismissed Holdings’ claims. The Court confirmed, however, that its overall jurisdiction over the lawsuit was not affected by dismissing Holdings (jurisdiction once properly acquired is not defeated by later events).

Bottom line

The case isn’t over but Holdings is out of it. The operator/leaseholder corporate structure does not automatically make Holdings a third-party beneficiary of the operator’s contracts.

Your musical interludes: Other people doing Dylan

Chrissie Hynde

Johnny Rivers

Susan Tedeschi

Elvis

It is often an attractive political gambit for legislative bodies to pass laws of doubtful constitutional validity in order to please their constituents. It can be a two-fer; when the court rules as expected the vanquished politicos then execrate the “activist judge”, securing even more votes and campaign contributions from said constituents owing to the politico’s “courage”.

And so it was with the 2021 Texas Legislature’s Senate Bill 13. The law prohibited state entities (retirement systems and the permanent school fund) from investing in or contracting with companies that “boycott” fossil fuels.  In American Sustainable Business Council v. Hegar, U S District Court Judge Alan Albright declared the law to be in violation of the First and Fourteenth Amendments of the United States Constitution.

The ASBC is an organization representing 200,000 businesses and advocates for advancing sustainable business practices, that is, it advocates against fossil fuels.

The “Divestment Provision” prohibited the state funds from investing in, and required them to divest from, financial companies (defined in the statute) that “boycott an energy company” (also defined). The Comptroller was required to make a list of all financial companies that engaged in such actions. The Comptroller was then authorized to create a blacklist from a mishmash of sources, including verifications from the financial companies themselves, and to provide the blacklist to the state funds. The funds were required to sell, redeem, divest or withdraw all public securities from the guilty (my word, not theirs) financial companies unless divestment would likely result in a loss in value or benchmark their deviation. The financial companies would have a 90-day warning to mend their ways.  

The “Procurement Provision” of the bill required vendors of contracts beyond a certain size to verify that they would not boycott fossil fuel companies during the life of the contract.

SB 13 violated the First Amendment

Judge Albright determined that SB 13 violated the First Amendment because it was facially overbroad.  A statute is overbroad when it purports to burden non-constitutionally protected activities but include within its scope of activities which are protected by the First Amendment. Even if the statute has a legitimate component, punishment of a substantial amount of protected free speech is sufficient to invalidate all enforcement of that law.

The court rejected the state’s argument that the statute only applied to commercial conduct. It permitted the state to penalize companies for all manner of protected expression regarding fossil fuels.

SB 13 violated the Fourteenth Amendment

SB 13 was also unconstitutionally vague. A statute violates the Due Process Clause when it either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at this meeting and differ as to its application. When the statute reaches expression sheltered by the First Amendment the vagueness doctrine demands a greater degree of specificity than in other contexts.

The three clauses of the “boycotting” definition (Opinion p. 7) were undefined and not susceptible of objective measurement or determination. Some of the blacklisted companies said their actions complied with the ordinary business purpose exception of the statute. The Court found that the Comptroller provided no explanation for why he determined that certain companies’ statements were not reliable.

SB 13 was impermissibly vague, in violation of the 14th Amendment, because in defining “boycotting” it failed to provide persons of ordinary intelligence a reasonable opportunity to know what conduct is prohibited and did not provide explicit standards for determining compliance with the law.

Your musical interlude

Co-author Taylor Hall

It’s hardly a win for the little guy against The Man, but in San Patricio County Appraisal District v. Gunvor USA LLC (consolidated with a similar suit against Devon Gas Services, agent for Glencore Ltd.), a Texas court declared that inventories of crude oil stored in coastal tank farms were exempt from ad valorem taxation under the Import-Export Clause, United States Constitution art. I, § 10, cl.2.

The Appraisal District taxed two crude oil traders, Glencore and Gunvor. The oil came by pipeline from the Permian Basin and was staged in tanks along the Corpus Christi Ship Channel to be loaded onto non–Jones Act vessels for export. Title to the oil passed from the producers at the tank farms and both exporters used the tanks and connecting pipelines. Because export terminals control berthing and require sufficient volume to meet a laycan window before calling a ship to berth both taxpayers argued that the oil was exempt from taxation under the Import-Export Clause and the Texas Tax Code. The appraisal review board denied both protests. The trial court granted summary judgment for the taxpayers and the Appraisal District appealed.

The Import-Export Clause

Historically, the Import-Export Clause was interpreted broadly to forbid state taxation on any property that is properly characterized as an “import” or an “export.” Early on, the U. S. Supreme Court characterized a product as an “export” only upon its physical entry into the stream of exportation.

A product is in the stream of exportation only when it has been shipped, entered with a common carrier for transportation to another state, or has started upon such transportation in a continuous route or journey. Under the “stream of export” doctrine, once a product is exported, it maintains its “export” status as long as it is in transit. But if there is a stoppage that serves the owner’s business purpose, the product will be subject to the taxing power of the state. The means of shipment are unimportant if the certainty of the foreign destination is plain.

Was the oil in export transit or in the stream of export?

The Court affirmed Supreme Court of Texas precedent held that goods “in transit” out of the country or “in the stream of export” enjoy bright-line immunity from taxation. Goods begin export movement when they start toward a precommitted foreign destination, and that temporary storage for export necessities does not break transit continuity. The oil here had begun movement to a precommitted foreign destination as of its appraisal date, which satisfied entry into the export stream. There were sales for foreign delivery, continuous export staging at export terminals, and the absence of any diversion to domestic use.

The Court rejected the Appraisal District’s assertion that the oil was not in transit because it was extracted from wells in Texas, and that the oil was taxable despite being bound for export because there were “incredibly large volumes of oil constantly present” stored at both tank farms. All the oil had a pre-committed foreign destination and all of it entered the stream of export. Interim storage at coastal tank farms reflected exportation necessities rather than owner business purposes.

Your musical interludes. The Beatles done by others:

Aretha Franklin

Tom Petty and the Heartbreakers

Kenny Rankin

Ross Vick

Co-author Taylor Hall

In SM Energy Company v. Buzzard Roost Farms, Inc. a Surface and Subsurface Use and Compensation Agreement between operator SM and surface owners included a right of first refusal (ROFR) relating to placement of saltwater disposal wells drilled within five miles of the “Surface Lands”. Failing to notice the ROFR, SM evaluated options for saltwater disposal, elected to buy nearby tracts, and drilled two SWD wells within the five miles. The owners demanded that SM comply with the ROFR.  SME sued for a declaration that the ROFR was invalid or ambiguous; the owners counterclaimed for breach.

SM argued that the owners didn’t sustain damages because they would have rejected the only offer that SM would have extended.

The jury found for the owners and awarded $9.3 million+/- in damages; the court later awarded attorneys’ fees and prejudgment interest.

On appeal, SM argued that the ROFR required it only to offer the owners the same terms and conditions that SM offered third parties to purchase their land, and that the jury charge and evidence on readiness and damages were legally deficient.

The ROFR

The Court began with the text:

“… should Operator choose to drill a [SWD well] within 5 miles of the Surface Lands, Operator shall give Surface Owner first right of refusal to have said [SWD well] placed on the Surface Lands or other lands adjacent thereto which are owned by Surface Owner,”

Applying the contract’s ordinary meaning, the Court held the provision required SME to offer to drill and place on the Surface Lands or adjacent land they own, any SWD SM chose to drill within five miles. SME conceded it made no such offer and that its purchase‑to‑own “self‑development” strategy was beyond the ROFR’s scope and not a term or condition the owners were required to accept.

The ROFR was triggered by SM’s decision to drill within five miles, which SM breached by failing to offer the owners the right to have the two wells placed on their land. The Court concluded that rights holder could not be compelled to accept terms beyond the scope of the ROFR absent express contract language. The ROFR did not tie the owners to third‑party land‑purchase terms, and the owners were not required to sell their land to exercise their right.

Readiness

The owners testified that they would have accepted an offer to drill and place SWDs on the Surface Lands, which aligned with the ROFR’s scope (SM asserted that the owners would have rejected any compliant offer). The jury found that the owners were “ready, willing, and able” to accept the same terms that SM had offered to drill and place the wells

Damages

Benefit‑of‑the‑bargain damages are to restore the injured party to the economic position it would have occupied had the contract been performed, and a jury’s award within the range of trial evidence should be affirmed. The jury awarded $4.9+ million for the value of the SWD wells, $2.9+ million in disposal fees, and $1.5 million in skim‑oil revenue.

The “value of the wells” award was improper and was vacated. Texas law rejects using cost to drill or construct as the measure of benefit-of-the-bargain for a breached drilling or similar obligation and the owners offered no competent valuation evidence distinct from the revenue streams.

The Court affirmed the disposal‑fee award as within the benefit‑of‑the‑bargain measure supported by SM’s internal economic analysis.

The Court affirmed the skim‑oil award.  SM’s own model assumed a skim‑oil value and the owners’ provided testimony and calculations using actual injected volumes.

The trial court deemed the ROFR ambiguous and submitted questions to the jury. the appellate court disagreed but said the jury’s instructions matched the law so the error was harmless.

RIP Sly Dunbar, drummer and half of the one of the funkiest rhythm sections ever.

Co-author Gunner West

Last year we reported on Steelhead Midstream Partners, LLC v. CL III Funding Holding Company, LLC, where the Texas Supreme Court held that a pipeline owner’s breach-of-contract claim was not an impermissible collateral attack on a foreclosure judgment. The case went back to the Fort Worth Court of Appeals for a decision on the merits. That decision is now in.

On remand in CL III Funding Holding Company, LLC v. Steelhead Midstream Partners, LLC, the Court of Appeals reversed the trial court’s $2 million judgment and rendered a take-nothing judgment against Steelhead.

The facts

CL III owned an interest in a pipeline and related oil and gas interests and entered into a joint operating agreement with Steelhead to govern operations and accounting for revenues and expenses.

Steelhead alleged CL III violated the JOA by failing to pay a pre-existing lien debt and by suing for foreclosure on the lien, which CL III had acquired by assignment.

The Court here framed the case narrowly: Did the JOA either:

  • require CL III to proactively calculate and pay its share of the lien without receiving a bill from Steelhead, or
  • prohibit CL III from acquiring, holding, or foreclosing on a preexisting third-party lien?

The Court answered “no” to both questions. Under the JOA’s plain language there was no such requirement or prohibition.

No invoice = no breach

The JOA incorporated a COPAS Accounting Procedures, the industry-standard framework for addressing joint account expenses. Under those procedures, the operator invoices owners monthly and owners must pay within 30 days of receipt.

Steelhead never billed CL III for the pre-existing lien. The Court held that without an invoice, CL III’s payment obligation was never “triggered.” The Texas Supreme Court has held that under similar COPAS procedures a non-operator’s payment obligation is not triggered until the operator sends a joint interest billing.

The Court rejected Steelhead’s argument that no invoice was required because revenues from operations consistently covered expenses. Steelhead used self-defeating logic: If the lien was a “contingent liability” that couldn’t be invoiced until the foreclosure judgment, then it wasn’t a JOA expense during CL III’s ownership. And if Steelhead could have invoiced it anyway, then Steelhead can’t blame CL III for Steelhead’s decision not to do so.

Acquiring or foreclosing on liens not prohibited

Steelhead also argued that CL III breached the JOA by acquiring and foreclosing on a lien that wasn’t a “Permitted Lien.” The court rejected this on several grounds.

  • “Permitted Liens” was a defined term under the JOA that imposes a duty on the operator to keep the property free from non-permitted liens. Nothing in the JOA prohibited owners from acquiring liens. The court noted, “A defined term is not a contractual prohibition.”
  • The JOA provision for “several, not joint” liability addressed debts arising “hereunder”, that is, the JOA. The lien was a preexisting encumbrance based on obligations to the construction company—not a JOA expense.
  • The JOA’s good-faith provision didn’t create a standalone duty. The court observed that a contractual good-faith provision is merely a “lens” through which other contract requirements must be viewed; it doesn’t create independent obligations.

The court emphasized that the JOA contemplated foreclosures between owners in certain contexts. Had the parties intended to prohibit all foreclosure actions against one another, they could have said so. They did not, and courts “will not squint to discover requirements [or prohibitions] that the parties themselves chose not to write into the memorialization of their bargain.”

Your musical interludes: Old and no so old

 The Collins mineral lease covers 1131.5 acres in Bienville Parish spread across 10 semi-contiguous tracts.   

The lease

Provision 6 of the form lease provides: In the event of cessation of production for any cause following expiration of the primary term, the lessee would be entitled to continue the lease in force by restoring production or conducting operations on the land or on lands pooled therewith within 90 days. (This is a severely simplified summary. You might want to read it yourself)

Exhibit A contains a Pugh Clause (again, simplified): Two years following the expiration of the primary term or any extension or renewal, in the event a portion or portions of the land is pooled with other land so as to form any pooled unit or units (emphasis mine), operations on such unit or units will not maintain this lease in force as to the land not included in such unit or units.

In the event of any inconsistencies the terms of Exhibit A supersede the form lease.

Provision 7 of the lease authorizes the lessee to voluntarily pool acreage. Neither Paragraph 7 nor Exhibit A mention compulsory units or the Commissioner of Conservation.

Five compulsory Haynesville Shale production units collectively encompassing all of the lease acreage were established by the Commissioner of Conservation. XTO operates the wells in these units. Two wells were drilled on portions of the lease included in a unit encompassing Section 18 of the land. Following expiration of the primary term, those wells did not produce during two periods of time exceeding 90 days each.

Triple C’s claims

In Triple C Minerals LLC v. XTO Energy, Inc., Triple C sued for termination of those portions of the lease in the unit for Section 18 arguing that the Pugh clause applies to compulsory pooled units and divides the lease on a unit-by-unit basis. Thus, maintenance of one unitized portion of the lease did not automatically maintain the other portions. The absence of production on Section 18 for two 90-day periods resulted in termination of the lease as to that acreage.

XTO’s response

Because the Pugh clause does not specifically state that it applies to compulsory pooled units, it should be interpreted against such application. The clause was not triggered because it applies only to voluntary pooled units created under the lease’s pooling clause and not to compulsory units created by the Office of Conservation. Even if the Pugh clause was triggered, it did not divide the lease on a pooled-unit-by-pooled-unit basis. Thus, production from wells on other sections maintained the entire lease. 

The Court’s analysis

Summary judgment granted in favor of XTO. The Pugh clause was not triggered by compulsory unitization. Under Louisiana law an oil and gas lease is an indivisible obligation unless the parties unambiguously agree otherwise. Creation of compulsory units by the Office of Conservation does not divide a mineral lease. To apply to compulsory units, a Pugh clause must be drafted to clearly apply to compulsory units.

No ambiguity                                     

The Court declined to consider extrinsic evidence. That process would apply to ambiguous contracts but those principles fail when long-standing jurisprudence sets a more specific interpretive role. Ambiguity as to the Pugh clause’s applicability to compulsory units should be resolved against the party seeking to sever the lease. The language of the Pugh clause clearly provides that it applies to voluntary units. The lease was not ambiguous

Your musical interlude. (All you need to know is that he loved Alida since he was 14 but mama does not approve. If she won’t let him have her he will put her in a wagon and take her home.) Not a contemporary love story!

In Ageron Energy LLC v. ETC Texas Pipeline, LTD Justice Busby authored a concurring opinion in the denial of a petition for review to the Supreme Court in which he criticized the majority opinion of the Court of Appeals saying it undermines important protections afforded mineral rights owners. To understand this case, see the COA’s opinion in a prior case, Regency Field Services v. Swift Energy and the COA majority opinion in this case. Also, Lightining Oil v. Anadarko E&P, was heavily cited by Justice Busby.

Res judicata

The COA majority held that a lessee’s suit can be barred by res judicata even if a claim for interference with subsurface development in a prior suit was not ripe and could not have been brought earlier. According to the COA majority, a surface injury claim that accrued before Ageron leased the minerals resulted in accrual of any and all other claims arising from the same allegedly unlawful conduct, including Ageron’s. To require parties to assert unripe claims would be pointless; the unripe claims will be swiftly dismissed. Regency did not alter Supreme Court cases holding that res judicata bars only claims that could have been asserted in the initial action.

The COA made two errors, says the Justice:

  • First, they ruled that the fact that a claim may be unripe will not stop it from accruing at the same time as a ripe claim based on an earlier injury caused by the same wrongful conduct.
  • Second, the COA misunderstood when a complete and present cause of action accrues for injury to mineral development rights.

The COA failed to appreciate that when different property interests are involved, the injuries are often distinct. The holding was contrary to the very definition of res judicata, an essential requirement of which is that the claims in the current suit could have been litigated in the prior suit. Ageron’s claims here could not have been litigated in the prior suit. Mere migration of contaminants into subsurface space is not, by itself, an injury to the mineral estate.

The single action rule

The COA was mistaken in applying the single action rule, which is a species of res judicata that prohibits splitting a single cause of action and subsequently asserting claims that could have been litigated in the first instant. It does not require asserting claims that were not yet actionable.

The question the COA should have decided is when Ageron’s claims for interference with mineral development rights accrued. Could the plaintiffs in Regency have asserted such claims in their prior suit, or at some other time before Ageron acquired its lease?

Texas law distinguishes between interfering with the place where minerals are found, which belongs to the surface owner, and interference with the minerals themselves, which belongs to the mineral rights owner or lessee. Interference with the subsurface is actionable only if it infringes the lessee’s ability (Busby’s emphasis) to exercise its rights.  

No harm, no foul
Because there was some evidence that trespassing gas infringed on mineral development before Ageron acquired its interest, the question of whether the evidence was conclusive was not important to the jurisprudence of the State. It was not clear that the COA’s legal errors led to an improper judgment, so he joined denying the petition for review

Your musical interludes (go to 30A Songwirters Festival)

Adam Hambrick (wrote it and sung it)

Tony Lane (Tony wrote it)

Jeremy Stover (Jeremy wrote it)

North Dakota surface owners defeated the carbon-storage lobby’s effort to steal their interstices.*  In Northwest Landowners Association, et al, v. State of North Dakota et al, a district court declared a portion of the CO2 underground storage statute (NDCC 38-22) unconstitutional because it provides for a government-authorized physical invasion of property, which constitutes a taking, and does not provide for just compensation required by the North Dakota Constitution.

The statute

The statute requires that before issuing a permit for underground carbon storage the North Dakota Industrial Commission must find that all nonconsenting pore space owners will be equitably compensated. If the operator fails to obtain consent of all pore space owners the Commission may require that nonconsenting owners be included in a storage facility and subject to CO2 storage. Once the project is completed, title to the facility and the stored CO2 would transfer to the State without payment of compensation.

The Supreme Court decisions

So-called NWLAI involved saltwater injection under portions of the statute. There the Supreme Court concluded that surface owners have a constitutionally protected property interest in pore space, and thus subject to a “takings” analysis under the North Dakota Constitution.  Permanent physical invasion is a per se taking.

This case is on remand from the North Dakota Supreme Court in “NWLAII” (Space does not allow a discussion). Some of plaintiffs’ claims were rejected. Remand addressed the issues on which they prevailed.

The pore space invasion would be extensive. Under the statute operators could inject millions of metric tons of CO2 into the pore space, store it for an undetermined amount of time, and eventually title to the pore space and carbon in the facility would be transferred to the State.

Is there “just” compensation

The court rejected the defendants’ argument that this case is different than NWLAI because there, the surface owners demanded compensation for physical occupation of pore space while this portion of the statute does not. Invasion of the pore space is a taking and requires just compensation. And there is a timing requirement.  Private property cannot be taken or damaged without “ … just compensation having been first made……. “.

Correlative rights doctrine does not apply

In rejecting the State’s argument that CO₂ storage is similar to oil and gas unitization, where owners can be forced into pooled units, the Court observed that unitization involves extracting a shared resource, not forcing storage of a foreign substance. NWLAI established that pore space is a vested property right, not a resource to be extracted. Applying correlative rights here would justify forced storage of any unwanted substance such as garbage or nuclear waste.

In unitization an owner would always be entitled to his just and equitable share of production to prevent waste and ensure maximum recovery of the landowner’s resource. This statute is not about maximizing extraction of a resource but instead the aim is to maximize storage of a resource – carbon – that may or may not be present on the owner’s property. Producing units share natural resources within the unit but in this case space amalgamation would bring carbon to property from wherever it was previously located, forcing nonconsenting owners to store carbon not native to their land. Then once the project is finished, the carbon and pore space goes to the State, depriving the landowner of that property right indefinitely.

No valid use of police power

The State’s argument that the law was a valid exercise of police power was rejected. The police power cannot authorize physical occupation of private property without compensation.

Result

Summary judgment for landowners; attorneys’ fees to be determined.

Bob Weir RIP and post-Dead Bob.

*In the spirit of General Jack D. Ripper?