Coauthors Sahrish K. Soleja and Lydia Webb

If you are a royalty owner and have questions about how your claim is likely to be treated when your lessee/operator goes into bankruptcy in Delaware, In re MTE Holdings LLC is a significant case.

Historically, royalty claims have been treated as funds placed in trust because they are not the property of the debtor’s bankruptcy estate – meaning royalty claims are not subject to the bankruptcy claims process altogether. However, in this recent decision a Delaware bankruptcy court, applying Texas law, held that royalty claims were in fact subject to the bankruptcy claims process and moreover, should be classified as unsecured, not secured, claims.

The dispute

In MTE, the debtors, operators of oil and gas wells, were lessees in several hundred oil and gas leases in Texas.  Under the leases the lessee would sell the production and distribute to each royalty owner its share of the proceeds.  Here, the debtors refused to pay proceeds to royalty owners in the ordinary course during the bankruptcy, the typical treatment for trust funds, because they lacked the funds to do so. This left the royalty owners with no choice but to assert the right to payment from the bankruptcy estate, secured by their interest in the oil and gas in place.  The question before the court was whether the royalty owner claims should be classified as secured or unsecured.  The answer means the difference between receiving payment in full (for secured claims) vs. pennies on the dollar (for unsecured claims).

The First Purchaser Statute

Looking at the statutory language of Section 9.343(a) of the Texas Business and Commerce Code, commonly referred to as the Texas First Purchaser Statute, the court held that the statutory lien created by Section 9.343(a) secures only an obligation to pay the first purchaser of produced oil and gas.  Meaning, a statutory lien was created for royalty claimants who took their production in-kind and turned around and sold it.  On the contrary, royalty owners who receive payment in cash do not receive the benefit of Section 9.343(a).  In MTE, none of the royalty claimants had exercised their option to receive payment in kind and thus could not claim secured status. This is, of course, the case with virtually all Texas royalty owners.  Because there was little to no money to pay unsecured claims, the royalty claims were effectively rendered worthless by the Delaware bankruptcy court.

Help has arrived

Some help for Texas royalty owners (but too late for the  MTE claimants) is on the way. Section 9.343(a) was repealed by the 2021 Texas legislature and replaced by a new statute, Section 67.002(a)-(c), effective Sept. 1, 2021, the Texas First Purchaser Lien Act. The new statute creates a real prooperty lien on hydrocarbons before they are extracted from the land. Whether royalty owners elect to take payment in kind or in cash, they will have a valid and enforceable lien against the debtor/operator.  But the larger concern is the Delaware bankruptcy court’s willingness to look past whether royalty claims should be subject to the bankruptcy process at all.

Your musical interlude.

Co-author Brittany Blakey

Let’s begin with a question: Master service agreements (“MSA’s” in the trade), once agreed upon, often remain in force for years. As time passes and circumstances change, the parties amend, sometimes losing sight of the original details. Was Stingray Pressure Pumping, LLC v. In re Gulfport Energy Corporation the result of forgetfulness or merely a Hail-Mary to avoid liability?

The MSA and amendments

Stingray Pressure Pumping and Gulfport Energy entered into an MSA for oilfield fracing services in 2013. The parties amended the MSA in January and July 2016, adding Gulfport Buckeye (now Gulfport Appalachia) as a party in the July amendment. The MSA was amended for the third time in 2018 to extend the term until the end of 2021.  That amendment was only signed by the original parties, not Gulfport Appalachia.

The litigation

In December 2019, Gulfport Energy sued Stingray in Delaware state court for breach of contract. Stingray countersued. In November 2020 Gulfport Energy and its wholly owned subsidiarie Gulfport Appalachia filed for bankruptcy in the Southern District of Texas. A dispute arose about whether Gulfport Appalachia remained a party to the MSA after the 2018 amendment. After reviewing the original agreement and the three amendments, the bankruptcy court held that Gulfport Appalachia was not liable under the MSA after September 30, 2018, the day the agreement would have ended without the 2018 amendment. Stingray appealed to the district court.

Gulfport Energy argued that Gulfport Appalachia was not liable after September 2018 because it was not a party to the July 2018 amendment that extended the MSA. Among other facts, it pointed out that the amendment did not explicitly include Gulfport Appalachia in the identification of the parties, and there was no signature block for Gulfport Appalachia.

The district court reverses

The district court disagreed. There was only one MSA – one that incorporated all of its amendments. The July 2016 amendment explicitly added Gulfport Appalachia to the definition of “Company” – as was required by the agreement in order to amend. Beyond that date, Gulfport Energy and Gulfport Appalachia both represented the “Company” as a party to the agreement. Without an explicit amendment in the 2018 amendment removing Gulfport Appalachia from the definition of the “Company”, it remained as a party to the agreement and was bound by the 2018 amendment. Additionally, the MSA did not require that all entities sign—just a signature for the “Company” and a signature for the “Contractor”. The 2018 amendment was signed by a “Company” representative and a “Contractor” representative, so it bound all.

Practice tip: Was the amendment flawed or was the challenge made on 4th and 25?

It’s a trick question. The answer can’t be discerned with certainty from the two-page opinion. The point for scriveners: Don’t forget the original terms when amending an old agreement.

Your musical interlude

Co-author Brittany Blakey

Sometimes writing too many alternatives into an oil and gas lease invites confusion … which provokes litigation … which results in disappointment for somebody … or everybody.

For example, the central issue in Vermillion FC, LP v. 1776 Energy Partners, LLC was the effect of a well-tract designation pursuant to a retained acreage provision. The parties entered into an oil and gas lease covering approximately 1100 acres in Zavala County Lessee 1776 Energy commenced drilling a horizontal oil well, the Byrd Ranch No. 1H, and began production, designated a 320-acre well tract, and notified Vermillion.

The parties spent the next three years fighting over whether 1776 Energy breached the lease by, among other things, retaining excess acreage in the well tract and untimely releasing non-retained acreage.

Vermillion sued for breach of contract and other claims. Both parties moved for partial summary judgment. Vermillion argued that the 1776 Energy’s 320-acre well tract should have been 40 acres and that the lease terminated as to all other acreage.  Specifically, Vermillion argued that the retained acreage clause required the well tract to have as few acres as possible for actual production.

The trial court granted Vermillion’s motion and denied 1776 Energy’s.

The clause (we are paraphrasing) defined the well tract as the “minimum number of acres” “producing in paying quantities”, but was qualified by

  • … which pursuant to the applicable field rules provides or permits for creation of an allowable sufficient to cover actual production;
  • … but was expressly limited of 80 acres plus the length of the horizontal well bore plus 330 feet on either side thereof; and
  • … notwithstanding the above, to the extent the Railroad Commission’s field rules provided for additional acreage, the rules would control.

After examining the field rules and the express language of the lease, the court of appeals concluded that 1776 Energy was entitled to retain 280 acres with respect to the well—not 40 acres as Vermillion argued or the 320 acres 1776 Energy wanted. The court distinguished this case from Endeavor Energy Resources v. Discovery Operating and XOG Operating v. Chesapeake Exploration by emphasizing the Supreme Court’s holdings that a retained acreage clause must be construed on its own language under governing principles of contract interpretation. Also, Endeavor and XOG involved vertical wells, not horizontals.

Concluding that the Byrd Ranch No. 1H Well retained 280 acres rather than 320, the court reversed and remanded. The additional 40 acres automatically terminated at the end of the primary term.  1776 Energy breached the lease by failing to release the 40 acres.

Your musical interlude.

Coach Eaux congratulates the Tigers for reading Energy and the Law

Resistance was futile for defendants opposing a temporary injunction sought by a party armed with a FERC Certificate of Public Convenience and Necessity that includes condemnation rights under the Natural Gas Act. In Venture Global Gator Express v. Land et al., Venture Global sought to condemn land in Plaquemines Parish, Louisiana, and a preliminary injunction for immediate possession of the property.

The NGA requires that the party seeking to condemn be unable to acquire the property by contract or unable to agree on compensation to be paid. Defendants, Capt. Zack’s Myrtle Grove Properties and ESB Louisiana Opportunities (who held an Option to acquire certain rights) challenged the characterization of a portion of the proposed servitude as temporary instead of permanent and accused Venture Global of not negotiating in good faith.

The right to condemn Continue Reading Louisiana Federal Court Allows Injunctive Relief Under FERC Certificate of Public Convenience and Necessity

Co-author Marcus Fettinger

Under the Fair Labor Standards Act, what is required for an employee to be exempt from overtime pay? Ordinarily, it’s a guaranteed minimum salary. As the Department of Labor has explained, being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined salary cannot be reduced because of variations in the quality or quantity of the employee’s work.

That seems straightforward, but it took the Fifth Circuit three rounds of deliberations to nail it down. The entire panel of the Court recently reconsidered a 2020 opinion in Hewitt v. Helix Energy Solutions Group, Inc. In its majority opinion, 12 of the 18 judges held that a daily rate can qualify as a salary if, and only if, the employer pays a minimum of $684 per week regardless of the amount that the employee works and a “reasonable relationship” exists between the minimum salary and the total amount paid. Continue Reading Fifth Circuit Tells the Oil Patch That a Day Rate is Not a Salary

Most bills filed in each legislative session fail. For the most part we are thankful for that. But today we summarize a few that survived while you weren’t paying attention. As usual, there are winners, losers, and rainouts.

HB 2730 beefs up the “Landowners’ Bill of Rights” in eminent domain negotiations and proceedings. It amends the Property Code, Water Code and Occupations Code. The effective date is January 1, 2022. Winner: Landowners.

SB 885 gives teeth to quitclaim deeds. It used to be that an owner who takes title through a quitclam could not be a bona fide purchaser and would be on notice of unrecorded conveyances and/or instruments not in their chain of title. Winner: Stability of Texas titles.

Civil Practice and Remedies Code §6.025 is amended and §13.006 is added. After the fourth anniversary of the date a quitclaim deed for real property is recorded in the deed records the deed will not affect the question of the good faith of a subsequent purchaser or creditor and is not notice to a subsequent purchaser or creditor of any unrecorded conveyance or transfer or encumbrance of the real property. This change applies only to quitclaims recorded after the effective date of Septmber 1, 2021. Before this amendment, §16.025 applied only to forgeries.

SB1259 hoses (can’t think of a dignified term) royalty owners by amending Natural Resources Code §91.402 to deny a common-law cause of action for breach of contract against a payor who withholds payments for a title dispute. The exception is if the contract requiring payment specifies otherwise (which they rarely ever do because it hasn’t been necessary). It applies to actions filed after the effective date of the Act, which, piling insult upon injury, was immediately upon the May 24th signing by the Governor. This is a legislative “fix”, on the second try, to the 2018 Texas Supreme Court decision in ConocoPhillips et al v. Koopmann.  Loser: Royalty owners.

HB 3648  requires the Public Utilities Commission and the Railroad Commission to adopt rules to designate certain natural gas entities as critical during an energy emergency.  Here is a summary by the House Research Organization. Winner: Consumers, … or a rainout?

SB 2154 requires that members of the Public Utilities Commission be residents of Texas. Winner: Consumers, … or a rainout?

SB 2 reorganized ERCOT. The Texas Tribune can explain it better than I. Winner: Consumers, … or a rainout?

SB 760 requries solar energy operators to clean up after their facilities are decommissioned and to provide financial security to see that it gets done. Winner: Landowners.

Lessees of state lands, pay attention. SB 1258 amends the Natural Resources Code to address a state lessee’s duty to drill an offset well or pay compensatory royalties if horizontal wells treated by hydraulic fracturing are located within 1,000 feet of a state lease. The Act specifies when an offset well would not be required, which depends on the location of the horizontal drainhole. Winner: Taxpayers and the state budget.

Your musical interlude, for old times’ sake. Winner: Black Lung disease. Loser: J. D. Vance’s relatives and pretty much all the characters in Justified.

 

I prepared this post before Ida. It might now be perceived as cynical, or unsympathetic to the plight of those affected in South Louisiana and the Northeast. Is the intensity of hurricanes exacerbated by global warming? Some say it is; some say it isn’t. Regardless, what to know and do about climate change is not going away. So here we go.

If your news about the Intergovernmental Panel on Climate Change comes from the Guardian, or the New York Times, or Miss Thuneburg and you prefer it that way, perhaps you won’t read any further. Otherwise, consider whether there are takeaways from the IPCC’s 3,936-page Sixth Assessment Report other than those by the aforesaid and other MSM’s.

By those accounts the results are scary; it’s “code red for humanity”; we are amidst a world “in parts burning, in parts drowning, and in parts starving”; it’s over, and we’ve lost; the condition is “catastrophic”; we’re gonna soon meet a fiery end; and so on.

Is the hysteria justified?

It’s confusing for sure, and ironic. After canceling the Keystone XL Pipeline, banning leasing and drilling on federal lands, and otherwise doing the Government’s best to hasten the demise of the domestic oil and gas industry, and only three days after the IPCC Assesment, President Biden asked OPEC to produce more oil … without offering the same to our job-creating, tax-paying, domestic producers!! (David Blackmon in Forbes)

Some of the reports are unbalanced, if you consider NPR’s reporting on wildfires.    (Watts Up With That?)

“Climate change” could be overblown. (Bjorn Lomborg)

Fixing climate change is ultimately an economic problem. (John Cochrane in Capital Matters, from National Review)

The claim of unprecedented manmade floods tied to climate change should be investigated (Watts Up With That?)

It appears there was manipulation of data to achieve a desired outcome (Watts Up With That!)

And was July really the world’s hottest month? (Not A Lot of People Know That)

Advocates of the IPCC agenda see an opportunity for the kind of  political and economic reimagination you shoud not want. They advocate socialism (the Guardian), and communism. (Diamondback, the University of Maryland student newspsper, a preview of our leaders of tomorrow)

China is going on a coal spree. (Yale School of Environment) …

… and holding John Kerry and the US’s climate agenda hostage for concessions on other issues, feeling stronger after our missteps in Afghanistan. (Powerline)

Do you know why the polar bear is no longer the poster child for climate change? (Canadian Geographic)

Just as with COVID, we are not in this together. (New York Post)

There are reasons why those in control lie and exagerate (Kevin Williamson, discussing the masterpiece that was Reefer Madness, the San Diego Police, and other examples)

Your musical interlude.

 

 

Co-author David Leonard

McFarland Land & Cattle, Inc. v. Caprock Solar I, LLC considered what is the required under New Mexico law to establish a public prescriptive easement, and brings to life the full meaning of “100 feet of bad road”.

The facts

A state road runs along section lines that divides property owned by McFarland from his neighbor. After a bridge washed out in 1954 the road was rerouted about 100 feet onto McFarland’s land, thereby presenting a problem for Caprock, the solar developer.

McFarland sued to enjoin Caprock from using the 100 feet of road to access a solar project located on adjacent property. McFarland argued the road was private, and had demanded far more compensation from Caprock than Caprock was willing to pay.

Caprock and Quay County (who intervened), claimed the road was public under the doctrines of easement by prescription, easement by implied dedication, and easement by estoppel.  The road (including the 100 foot jog) had never been formally established as a public road using ordinary statutory procedures.

At trial several witnesses testified that the road was only used by neighboring ranchers or their invitees.  There was also testimony, relied upon by the court of appeals, that members of the general public might have used the road five to ten times over a thirty-year period.

The trial court entered judgment in favor of defendants and Quay County, declaring that the road was public.

Requirements for a prescriptive easement

A party wanting to establish an easement by prescription in New Mexico must prove:

  • adverse possession of the land,
  • that is open and notorious,
  • continued without interruption,
  • for the 10-year prescriptive period.

The result

The court of appeals found that the limited use by the general public did not satisfy Caprock and the County’s burden of proof:  To present clear and convincing evidence of public use (a higher standard than the preponderance of the evidence typically required in a civil case).  Use by neighbors and their invitees did not qualify. The court reversed and remanded the case for trial on the other theories that might be used to establish Caprock and Quay County’s right to use the road:  easement by estoppel and easement by implied dedication.

RIP Don Everly

In Lexington Land Development LLC v. Chevron Pipeline Company et al, a Louisiana landowner’s suit for damages to land alleged to have been caused by oil and gas operations failed to survive exceptions of prescription and the subsequent purchaser rule.

The facts

In 1959 the Hoffman heirs granted a mineral gas lease on 343 acres in East Baton Rouge Parish to Chevron’s predecessor. Shell Pipeline owns and operates a pipeline across the property. Hoffman also granted surface leases to Chevron. In 1962 the surface leases expired and in 1963 Chevron relinquished its rights in the mineral lease except for three production units. The lease was assigned to Stone Petroleum and, in 1991, to Zinn Petroleum. Lexington purchased the property in 2005 from the Hoffman heirs for development of a subdivision.

Lexington sued Chevron, its successors, and Shell in 2007 after being notified of a rupture in the Shell pipeline. After adverse rulings, Lexington obtained assignments of rights from the Hoffman heirs and amended its petition.

Liberative Prescription Continue Reading Louisiana Land Damage Claim Can’t Survive Prescription and Subsequent Purchaser Rule

Lollygag: To fool around and waste time; dawdle.  As in, “I lollygagged for 15 years after filing my suit and obtained a less-than-optimal result.”

Gramwich Oil and Gas Corporation et al v. Meng addressed claims for lease termination, repudiation, laches, cessation of production, and failure to produce in paying quantities. The facts are dense and the savings clause at issue is sui generis, so I won’t go into lots of detail. The takeaway: If you have a claim, prosecute it.

The facts Continue Reading Lessor Prevails in Texas Lease Termination Dispute