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)

Co-author Gunner West

Yes, says Trivista Oil Company LLC v. Fort Apache Energy, Inc., Trivista sued Fort Apache for poaching its mineral lessors and obtaining top-leases in what could have been a more or less typical dispute of that nature. But a Texas court of appeals affirmed dismissal with prejudice of all claims against Fort Apache under the Texas Citizens Participation Act, Texas’s anti-SLAPP statute (Strategic Lawsuits Against Public Participation).

Fort Apache’s communications with landowners about well conditions and top-leasing qualified as speech on matters of public concern, and the TCPA’s commercial-speech exemption didn’t apply.

The facts

Trivista operates roughly 250 wells in the Serbin (Taylor Sand) field across Bastrop and Lee Counties. In 2024, lessor Nancy Littlefield locked Trivista’s pumpers out of the Act Ranch Lease lands, saying she’d signed a new lease with Fort Apache. The lockout lasted less than a day.

Trivista discovered Fort Apache had been contacting its lessor-owners across the area to solicit top-leases. Trivista sued for tortious interference, declaratory judgment and trespass to try title, and obtained a temporary restraining order. The trial court later denied the temporary injunction, and Fort Apache moved to dismiss under the TCPA.

The court’s analysis

The court worked through the TCPA’s framework in three parts.

First, all of Trivista’s claims were “inextricably intertwined” with Fort Apache’s communications to lessors. Trivista argued its trespass to try title claim stood independent of any speech because the cause of action doesn’t require proving a communication. The court disagreed. Trivista’s own pleadings, its president’s testimony and a landman’s affidavit all traced the alleged harm back to Fort Apache’s contact with landowners. Also, Trivista never specified to the trial court which property was the subject of its TTT claim and didn’t mention it at the TCPA hearing.

Second, Fort Apache’s communications related to a “matter of public concern” (§27.001(7)). Fort Apache’s agents inspected 45 wells and found 36 with some form of leak or spill. They documented equipment in disrepair, storage tanks with holes, and wells choked with vegetation. One well appeared to be producing without a required permit or with misreported revenue. Lessor-owners wrote back to Fort Apache expressing frustration with Trivista and hoping wells would be cleaned up. The court found that private statements about safety and environmental risks satisfied the public-concern requirement. Given the scale (20,000 acres, hundreds of landowners, overlap with the Lost Pines Habitat Conservation Plan) and the community responses, these communications went beyond a private contract dispute.

Third, Trivista invoked the TCPA’s commercial-speech exemption, arguing Fort Apache was “primarily engaged in the business of selling or leasing goods or services” because oil and gas leases include covenants to produce, market, and deliver royalties. The court rejected this on the first Castleman element. A mineral lease is a real property interest under Texas law. The TCPA doesn’t define “goods,” and the court applied the word’s plain meaning: tangible or movable personal property, not realty. The court held Fort Apache was in the business of securing development rights, not selling goods or leasing services. The exemption didn’t apply.

The result

Trivista did not argue on appeal that it had established a prima facie case for any of its claims. The court affirmed dismissal with prejudice.

Your musical interlude.

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.”

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