Petro-Hunt L.L.C. vs. Wapiti Energy L.L.C. causes one to think about the effect of a gas imbalances on a producing property acquisition and the importance of so-called “boilerplate” in the purchase agreement. It is also the saga of a bad day at the plate for the seller.
Let’s say I sold you an interest in gas wells which, after closing, turn out to be over-produced. You bought another interest in the same field from mighty Exxon in a more-or-less simultaneous transaction. Those interests were under-produced.
I refuse to settle up as required by our purchase agreement. My response to your suit for damages is that the overproduced and under-produced interests that you acquired wash each other out. Whatever value you lost from me, you will get back from Exxon. By not considering your value received from the other guy, you failed to mitigate. I win – home run! Not so fast, said the court. The under-production you might recover from the Exxon interest has no bearing on your claim against me. My over-production diminished the value of the asset you purchased from me, the purchase price of which was based upon there being no over- or under-production. Strike one.
Next pitch: I say your damages are determined by the value of each over-produced MCF at the time it accrued, set off by the value of each under-produced MCF at the time it accrued. At least a single? Wrong again. The value of your loss was determined on the date of the sale of my interest to you. Strike two.
I’m in a hole at 0 and 2, but maybe I can dribble out an infield hit. Your attorney’s fees award was 75% of your damage recovery. The court should have reduced the fees, I say. The Texas Supreme Court recognizes a number of factors that go into an award of attorney’s fees. The amount of fees must bear some reasonable relationship to the amount in controversy, but that factor alone is not determinative. The mere fact that attorney’s fees meet or exceed the amount of damages does not automatically establish that the fees are unreasonable. Strike three; the futility is complete. You’re feeling like JustinVerlander and I’m looking like Reggie Jackson.*
The ‘boilerplate” that was important in this decision was the survival of warranties and representations after closing and the further assurances clause. Hunt’s representation that there were no gas production imbalances survived closing. And the parties provided for a post-closing final settlement statement. The amount of the imbalances had not been determined at that time. Wapiti relied on the further assurances provision to require Hunt to honor its representation months later when the imbalance was determined.
*Why Reggie? Mr. October leads all batters in the history of major league baseball in strikeouts. http://www.youtube.com/watch?v=70I4xRbsT4Q