Co-author Carolina Cuppitelli*

The question presented in Aaron v. Fisher et al: Did mineral deeds bestow separate property upon the grantees by gift, or did they convey a community property interest to the grantees and their spouses by sale for consideration?

Why was the question important? A gift is the grantee’s separate property; a sale is community property if the grantee is married.

In 1971, Lilly Parker conveyed to each of her six children, including W. T. and Chester, an undivided 1/12 interest in minerals in land in Glasscock County, Texas. Each deed recited consideration and referred to the conveyance as “this sale.”

There followed a series of intestate successions, details of which are more tedious than the entire first chapter of the Gospel of Matthew and not significant for our discussion. Among Lilly’s descendants were Aaron, the appellant, and the Elams and the Fishers, the appellees. Pioneer, relying on an affidavit of death and heirship from Aaron and a division order signed by him, paid Aaron royalties that Pioneer credited to the mineral interest originally conveyed from Lilly.

The conveyances were sales for consideration

The Court held that the 1971 deeds conveyed the mineral interests by sale for consideration and not by gift. The deeds expressly referred to the conveyance as a “sale” and recited a purported consideration of $10.00. The Court declared that the plain language of the unambiguous deeds indicated that the parties intended for the conveyances to be sales for consideration. It follows, then, that the mineral interests became the community property of W.T. and Chester and ultimately passed to their spouses. Had the transaction been a gift, the minerals would have passed to their sister, Aaron’s aunt. Did Lilly intend a sale? We suspect not in this mother-to-children transaction, but the plain language of the document required the Court to call it a sale.

Money Had and Received

The trial court granted the Fishers’ claim for money had and received. That remedy is a form of equitable relief to prevent unjust enrichment when the defendant holds money that rightly belongs to the plaintiff. The Fishers prevailed because they established that the royalty payments Aaron received from Pioneer, in equity and good conscience, belonged to them.

Takeaways

First, in any document transferring property is the importance of accurately stating the parties’ intent. Perhaps Lilly intended to give, not sell, the mineral interests to her children, but because of the express language of the deed the court was left with little choice but to declare the conveyance a sale. Had the scrivener clearly stated that Lilly wanted to gift her interests to her children, the result would have been different.

Second, make a will, even though you are currently immortal and therefore don’t need one, and you might have to pay a lawyer. Fail to accomplish this modest task and upon your transition to the hereafter your loved ones will curse you for your indolence and lack of foresight and your memory will be diminished from the dearly departed to the just plain departed. A mournful legacy indeed, but you’ll be dead so maybe you don’t care.

Your musical interlude.

*Carolina is a Gray Reed summer associate and will soon begin her third year at SMU law school.

Author Ethan Wood

A pipeline company condemning property of a governmental entity? That’s something you don’t see every day. Score a win for “big pipe” against “big government”. In Harris County Fresh Water Supply District No. 61 v. Magellan Pipeline Company, LP and V-Tex Logistics, LLC, a special purpose district unsuccessfully argued that it had governmental immunity from a pipeline condemnation suit.

Background

Magellan and V-Tex are pipeline companies who entered into an agreement to construct a pipeline for refined petroleum products. One of the parcels that needed to be acquired for the project was a 30-acre tract of land owned by Harris County Fresh Water Supply District used for a stormwater-detention pond. The parties entered into negotiations for an easement in late 2017 but could not reach an agreement. Eventually, an idea was floated to make an initial payment and resolve issues related to additional compensation in a condemnation proceeding. The pipeline companies’ counsel sent an email to the district’s counsel summarizing the proposal, to which the district’s counsel responded, “Very good. Thank you.”

The Condemnation Proceedings

The pipeline companies commenced condemnation proceedings shortly thereafter. The parties executed an agreement providing for partial settlement, setting out the terms for payment (i.e., an initial payment of approximately $500,000 and additional compensation as awarded) and providing that the district would not contest the condemnation proceedings. At the administrative portion of the proceeding, the appointed special commissioners assessed that the additional compensation should be $160,000. At the judicial portion of the proceeding, the district objected, arguing that the property was already devoted to an existing public use and that the $160,000 award was not adequate compensation. After summary judgment and a trial as to remaining fact issues, judgment was entered for the pipeline companies. The companies would have their easement and the district would receive the initial payment and the additional compensation as assessed by the special commissioners.

Governmental Immunity Arguments

The district appealed, arguing first that it enjoyed immunity from condemnation suits as a subdivision of the state. Generally, there are two situations in which a governmental entity may not be immune from suit: legislative waiver and judicial abrogation. Legislative waiver occurs when the legislature consents to suits against a governmental entity. Judicial abrogation involves modification of the common law concepts of sovereign immunity due to the conduct of the governmental entity or when a governmental entity voluntarily engages in litigation.

In this instance, the court of appeals found that the district’s voluntary participation in the condemnation proceeding was an abrogation of its right to claim governmental immunity. Agreeing to the concept by email (“Very good. Thank you.”) and entering into an agreement for partial settlement “clearly indicated that [the district] was contractually agreeing to participate in the condemnation proceeding.”

Additional Arguments

The district also argued that the pipeline company had not presented sufficient evidence of its common-carrier status (required for condemnation) and that the district’s use of the tract was more important the pipeline companies’ proposed use. The court ultimately held that these issues were waived by the district when it agreed not to contest the proceeding. The trial court ruling was affirmed.

This week’s musical interlude

If you administer or advise on master service agreements, or for that matter any other contract that requires written notice, this post by my Gray Reed partner Joe Virene is essential reading:

Texas Supreme Court: Actual Notice Does Not Satisfy Written Notice Requirement

In short, the Supreme Court of Texas reversed a jury verdict in favor of a construction project owner because the owner’s notice of termination to the contractor did not comply with the written notice requirement of the parties’ contract.

Your musical interlude.

 

 

 

Co-author Brittany Blakey

Recall our recent post on Carl v. Hilcorp Energy Company from the U.S. District Court for the Southern District of Texas discussing the lessee’s royalty obligations on gas used off the premises in a market-value lease. See now, Fitzgerald v. Apache Corporation: Different judge; same district; similar facts, lease provisions, and contentions; same skunk at the royalty owner’s garden party; semi-similar reasoning.

The issue was whether Apache was paying royalty on the correct amount of gas used off-lease.

Fitzgerald conceded that whether gas is sold or used off-lease, her royalty was based on the market value, which requires the deduction of PPC’s. However, she was unable to explain how she could both be owed royalties on gas consumed in the post-production process and receive a royalty payment at market value for gas that is sold.

Fitzgerald conceded that her royalty payment for gas used off-lease would be subject to deductions. But if all gas used off-lease is consumed in PPC’s for gas that is sold, there is no amount of remaining gas used for which a royalty payment could be calculated. Therefore, Fitzgerald failed to explain how the gas consumed in the process could have a market value greater than zero. Said the court, she needed to allege:

  • some amount of gas used off-lease,
  • for which the market value amounts to more than zero,
  • for which, when properly accounted, she would be entitled to a net gain of royalty payment.

Fitzgerald only alleged that Apache deducted PPC’s, and that Apache deducted costs that it was permitted to deduct from the market value of gas sold; thus, she did not allege that Apache underpaid her royalties for gas sold or used off the lease.

Without allegations to support that Fitzgerald was underpaid royalties, Fitzgerald failed to state a claim for breach. Even if her allegations were sufficient to state such a claim, she did not allege actual damages (an essential element of a breach of contract claim) resulting from the breach.

A musical interlude for the Carl’s, Fitzgerald’s, and others in the same juridical boat.

Co-author Brittany Blakey

In City of San Mateo, et al v. Chevron Corporation, et al, six California jurisdictions sued 13 energy company defendants for global warming-related claims.

The question in this round was whether the federal district court was wrong in remanding the suit to state court after it had been removed to federal court by the defendants. The district court was correct. That court lacked subject matter jurisdiction under any of the grounds asserted by the defendants.

The court received amicus curiae briefs from many different pro- and anti-fossil fuel organizations and jurisdictions. This post is not a report on the nuances of the removal and remand process, but rather to describe the nature of the lawsuit, which is similar to others against energy companies.

The allegations are that the following actions of the energy companies “ … is a substantial factor in causing the increase in global mean temperature and consequent increase in global mean sea surface height.”:

  • “extraction, refining and/or formulation of fossil fuel products;
  • introduction of fossil fuel products into the stream of commerce;
  • wrongful promotion of the fossil fuel products;
  • concealment of known hazards associated with use of these products; and
  • failure to pursue less hazardous alternatives available to them … “

The plaintiffs allege that they ”have already incurred and will foreseeably continue to incur, injuries and damages because of sea level rise caused by [the energy companies’] conduct.” Among other examples of damage, they cite:

  • flooding that causes injury and damages to real property and its improvements;
  • flooding that prevents the free passage on, use of, and normal enjoyment of real property or permanently [destroys] it;
  • Surfers Beach near the city of Half Moon Bay has lost 140 feet of the accessible beach since 1964 due to erosion which has been exacerbated and substantially contributed to by sea level rise and increased extreme weather;
  • infrastructural repair and reinforcement of roads and beach access.

The causes of action (all based on California state law):

  • public and private nuisance,
  • strict liability for failure to warn,
  • strict liability for design defects,
  • negligence,
  • negligent failure to warn, and
  • trespass.

The energy companies removed because the claims:

  • raised disputed and substantial federal issues,
  • were preempted by federal law,
  • arose on “federal enclaves”,
  • arise out of actions and operations on the outer continental shelf,
  • arise from actions taken pursuant to a federal officers’ directions,
  • are related to bankruptcy cases, and (one would think),
  • “get us the hell away from the wrath of a ‘fair and impartial’ local California judge and jury”.

All were unsuccessful. As the courts are fond of saying, “The plaintiff is master of his pleadings.”

This round is over; expect the case to be aggressively contested for years to come.

Your musical interlude

Co-author Brittany Blakey

The question is presented again but in a different format: In Texas is a lessee allowed to deduct post-production costs (PPC’s) from the lessor’s gas royalty? In Carl v. Hilcorp, the answer was “yes” based on the language in the oil and gas lease at issue. The question was for gas used by the lessee off the lease premises.

The lease provisions

Gas royalty owners brought a class action in the U. S. District Court for the Southern District of Texas alleging underpaid royalties on two wells. Paragraph 3 of the lease addresses gas royalty and free use of gas:

  • The royalties to be paid by Lessee are: … on gas, … produced from said land and sold or used off the premises or in the manufacture of gasoline or other product therefrom, the market value at the well of one-eighth of the gas so sold or used …
  • Lessee shall have free use of oil, gas, … from said land, …, for all operations hereunder, and the royalty on oil, gas and coal shall be computed after deducting any so used.

Hilcorp did not pay royalty on gas used off the lease premises. Plaintiffs alleged that the royalty clause requires royalty to be paid on any gas used off the premises and that, even absent the royalty provision, the free use clause independently and expressly allows gas to be used only on the lease premises, so royalty must be paid for gas used off the premises.

Hilcorp responded that the market-value-at-the-well valuation means that royalties need not be paid on gas used off the premises that increases the value of the raw gas in preparation for downstream sale. The “off-lease use” and “free use” provisions do not change this structure.

A refresher on “market value at the well”

The court reviewed the seminal Texas cases: BlueStone v. Randle, Heritage, Burlington Resources, French, and from Mississippi, Piney Woods. When the location for measuring market value is “at the well,” market value may be estimated by subtracting from proceeds of a downstream sale PPC’s incurred between the well and the point of sale. Because these costs add value to the gas, backing out the necessary and reasonable costs between the sales point and the wellhead is an adequate approximation of market value at the well. Therefore, for gas that is subsequently treated, processed and transported for sale at a remote location, necessary and reasonable value-enhancing PPC’s are properly deducted from the royalty calculation.

Gas royalty

Applying that methodology, the court found that reasonable and necessary PPC’s may be deducted from the royalty calculation. As the Texas Supreme Court explained in Burlington Resources, the term post-production costs generally applies to processing, compression, transportation, and other costs expended to prepare raw oil or gas for sale at a downstream location. The lease in this case did not define “post-production expenses” in any unique way. The Complaint as much as acknowledged the standard arrangement. The Court concluded that these “off-lease” uses are PPC’s that are properly excluded from the royalty calculation.

Free use

The Court agreed with Hilcorp that despite that free-use was only for on-lease operations, Hilcorp was not precluded from deducting gas used as fuel or in-kind payment for post-production services in this market-value-at-the-well lease. The Court determined that under Texas case law, the market-value-at-the-well provision is the critical clause. The court interpreted Paragraph 3 as a matter of law and determined that Hilcorp was entitled to deduct reasonable and necessary value-enhancing PPC’s.

A musical interlude for your grandfathers, uncles, aunts, fathers, mothers, brothers, sisters, husbands, wifes, sons, and daughters who have served in the military.

Co-author Jamie Mills*

Is it worth spending extra dollars, days, and windshield time to discover what mischief your oil and gas operator might be making on your property? The landowner-plaintiffs in Mustafa v. Americo Energy would certainly say so.

The “discovery rule” offered them no help in their suit against their lessee for negligence when visible soil contamination occurred over two years before suit and was filed and the landowners had not visited the property in over six years. The two-year statute of limitations barred the landowners’ claim. Continue Reading Landowners Vanquished by the Discovery Rule

Co-author Carolina Cuppetilli*

Today we will skip our usual routine of explaining how court rulings on the question of the day might affect your interests. Instead we will discuss the fallout from abysmal document drafting. In Rosetta Resources Operating v. Martin, the Supreme Court of Texas cautioned that an express covenant to protect against drainage suffered from both lack of clarity and lack of accuracy. Although the Court attempted to harmonize the conflicting provisions in an effort to give effect to the intent of the parties as expressed in the contract, “Addendum 18” was so riddled with grammatical and typographical errors that its interpretation should not be relied upon as a useful guide for determining how covenants to protect against drainage typically function. (We’ve discussed Addendum 18 before.)

The clause

Addendum 18 of a mineral lease between the Martins as lessor and Rosetta Resources as lessee was an express covenant to protect the premises from drainage:

… [It] is further agreed that [(1)(a)] in the event a well is drilled on or in a unit containing part of this acreage or is drilled on acreage adjoining this Lease, [(b)] the Lessor [read “Lessee”], or its agent(s) shall protect the Lessee’s [read “Lessor’s”] undrilled acreage from drainage and [(2)] in the opinions of reasonable and prudent operations [read “operators”2], [(a)] drainage is occurring on the un-drilled acreage, even though the draining well is located over three hundred-thirty (330) feet from the un-drilled acreage, [(b)] the Lessee shall spud an offset well on said un-drilled acreage or on a unit containing said acreage within twelve (12) months from the date the drainage began or release the acreage which is un-drilled or is not a part of a unit which is held by production.

(Emphasis added by the Court to aid its analysis)

The facts

Rosetta, Newfield and others created the Martin Unit, pooling portions of the Martin Lease. Rosetta assigned an ORRI in the Martin pooled acreage to Newfield. Newfield drilled the Martin well on the Martin pooled acreage and then created the Simmons Unit that is not adjacent to the Martin Lease, and drilled the Simmons well.

The Martins sued Rosetta and Newfield for breach of Addendum 18, alleging an obligation to protect the undrilled Martin lease acreage from drainage caused by the Simmons well. Lessees countered that their obligation to protect had not been triggered because the Simmons well was not drilled on land adjacent to the Martin Lease.

The trial court granted summary judgment for Rosetta. The court of appeals reversed and remanded, instructing the trial court to grant partial summary judgment for the Martins. At the Supreme Court the parties argued over whether Addendum 18 allowed for separate triggering and draining wells.

The Court’s analysis

Could Addendum 18 be reasonably read to stand for the proposition that drainage that part (1)(b) obligates Rosetta to protect against is limited to drainage from a well listed in part (1)(a)? There were two reasonable interpretations regarding this question. If the meaning of the lease is uncertain and doubtful, or it is reasonably susceptible to more than one interpretation, then a fact issue arises regarding the parties’ intent.

Because both interpretations were reasonable there was an issue of material fact, rendering summary judgment improper. The Court punted the case back to the trial court for further consideration (likely a trial on the merits where a jury will sort it out).

Your musical interlude. 

* Carolina has recently survived her second year at SMU Law School and is a Gray Reed summer associate.

Co-author David Leonard

If perpetuation of a mineral lease beyond the primary term is contingent upon continuous operations, do traditional notions of “production in paying quantities” always matter? Spoiler: No.

In Thistle Creek Ranch, LLC v. Ironroc Energy Partners, LLC, an appellate court affirmed partial summary judgment in favor of lessee Ironroc Energy Partners under these odd clauses in the Kettler lease.

The habendum clause:

Unless sooner terminated …  this lease shall remain in force for a term of three (3) years from the date hereof, hereinafter called “primary term,” and as long thereafter as operations, hereinafter defined, are conducted upon said land with no cessation for more than ninety (90) consecutive days.

The lease defined “operations” as:

“ … any of the following: drilling, testing, completing, reworking, recompleting, deepening, plugging back or repairing of a well in search for or in any endeavor to obtain production of oil [or] gas, …  production of oil [or] gas, … whether or not in paying quantities.

The oddity, of course, is that the lease could be perpetuated by operations, whether or not there was production in paying quantities. Continue Reading Lease Perpetuated Beyond Primary Term Without Production in Paying Quantities

Co-author Brittany Blakey

The question in litigation is usually “WHAT”: what happened, what contract was breached, what did someone do or fail to do, and so on. In Hughes v. CJM Resources, LP, the question was, “WHO” had the right to file the suit in the first place? The Eastland Court of Appeals affirmed the trial court’s holding that the plaintiff no longer owned the causes of action he pursued after he conveyed his mineral and royalty interests to a third party.

The timeline and the suit

  • September 2017: Hughes, as lessor, enters into a paid-up oil and gas lease with CJM.
  • February 2018: Hughes assigns the minerals to Decatur Mineral Partners conveying all “claims and interests in and to the [“… well(s), land(s) and/or unit(s)”].
  • November 2018: Decatur executes a Mineral Deed to Universal Royalty & Mineral Fund purporting to convey all of Decatur’s interest that it received from Hughes.
  • September 2018: Hughes sues CJM; dismissed for lack of standing.
  • 2019 but effective 1/1/2018: Decatur reconveys the claims to Hughes (without success, it turns out).
  • August 2019: Hughes again sues CJM alleging false representations, fraud and negligent misrepresentation in the lease negotiations.

CJM responded with a plea to the jurisdiction asserting that Hughes did not have standing, specifically that he conveyed any causes of actions he had under the lease when he assigned the minerals to Decatur. Hughes countered by contending Decatur’s deed to Universal excepted (or reserved) the causes of action that Hughes now asserts.

The trial court granted CJM’s plea to the jurisdiction, concluding that Decatur’s Mineral Deed to Universal conveyed everything that Decatur received from Hughes in the original conveyance, including any causes of action.

On appeal, the court analyzed the Mineral Deed from Decatur to Universal to determine if Decatur retained the causes of action after the conveyance—because Decatur purportedly conveyed the claims back to Hughes after the conveyance to Universal.

The greatest estate doctrine

In Texas, deeds are generally construed to confer upon the grantee the greatest estate that the terms of the instrument will allow. In other words, a deed will pass whatever interest the grantor has in the land, unless it contains language showing a clear intention to grant a lesser estate.

Decatur’s deed to Universal stated that Decatur “does hereby grant, bargain, … to [Universal] all of [Decatur’s] interest in [the subject lands]… [.]” The conveyance also identified the interest Decatur conveyed to Universal as the interest Decatur received from Hughes. Therefore, the court concluded that the parties’ objective intent in the Decatur-to-Universal conveyance was for Decatur to convey all interests it obtained from Hughes. These interests included the causes of action that Hughes conveyed to Decatur.

The “subject to” clause

The Decatur-to-Universal deed was was “subject to” rights in valid oil and gas leases, and purported to grant to Universal “… benefits which may accrue after the date of this Mineral Deed”. The court construed that clause as purporting to except property from the conveyance, but the clause did not identify the causes of action with sufficient specificity and therefore did not except the causes of action from the deed.

Lessons learned?

Make your exceptions and reservations specific, especially if you know exactly what you are trying to carve out. Otherwise you might have regrets, like Lake Street Dive, or only left with Darius Rucker to console you.