Welcome to the binary edition, where you have a choice: An informative and engaging stroll through the history of the oil and gas business in Texas, or a wonkish and also informative legal analysis.

First, at the recent summer meeting of the Texas Independent Producers and Royalty Owners, TIPRO (and Drilling Info) president Allen Gilmer presented Texas Oil and Gas: Sustainable, Clean and MAGNIFICENT. In it Allen summarizes the history of oil and gas production in Texas from 1866, the economic impact of the industry, and improvements in environmental stewardship. A video would be better but the slides tell the story well enough.

For practitioners looking for an excellent summary of recent oil and gas cases from the Supreme Court of Texas, my Gray Reed partners Chance Decker and Ryan Sears offer Top 10 Supreme Court Cases of 2017 (So Far).

And if you prefer your information in pictures, here is the PowerPoint to accompany the written material.

Speaking of choices (binary plus? Sounds like gender options on a California college student application), how do you like your Corrina, Corrina? The Boz Skaggs Memphis blues way, a Wynton Marsalis (featuring Taj Mahal and Eric Clapton) Dixieland version, or Asleep at the Wheel Texas Swing style?

too lateWhen must a neighbor sue for nuisance and trespass or else be barred by limitations? It’s a tricky question. In Town of Dish et al v. Atmos Energy et al, the Texas Supreme Court concluded that the claims were time-barred. The limitations train had left the station.

The rules

Here are factors considered by the court that govern when these cases must be brought:

  • Limitations runs two years from the time the claim accrues.
  • When a claim accrues (and the limitations clock begins to tick) is a question of law for Her Honor, not the jury.
  • Trespass and nuisance claims accrue once a “known injury begins.”
  • Normally, such claims don’t accrue when the source is under construction. However, once operations begin and interference occurs, the clock starts.
  • Once a claimant learns of a wrongful injury, limitations begins to run even if the claimant doesn’t yet know the specific cause of the injury, the party responsible, the extent, or the chances of avoiding it.
  • A claimant’s subjective belief as to the accrual date doesn’t matter. A nuisance is a condition causing unreasonable annoyance to persons of ordinary sensibilities. Its an objective test.

Continue Reading Limitations Runs on Nuisance Claims

certificate of participationCo-author Chance Decker

You are a service company and you’ve been sued for a defective frac job. It looks scary but there’s no detail in the petition and no certificate of merit is attached. What is your response:

  1. “Such a pity; my fifth-grader got one for finishing next-to-last at the track meet”;
  2. He should borrow one from the scarecrow;
  3. Panic, offer a nice settlement to the plaintiff if, for the love of Jesus, Mary and Joseph and your non-exempt ranch in West Texas, he’ll just go away;
  4. Ponder the difference between “shall” and “may”.

Perdenal Energy LLC v. Bruington Engineering, Ltd. asked whether a court must dismiss an engineering defect lawsuit filed without a certificate of merit with prejudice (never to file suit again) or may dismiss without prejudice (to refile once they obtain a certificate). Continue Reading Suit For Bad Frac Job Requires a Certificate of Merit

fireIs condensate a contaminant? When it spills and burns a worker, yes. In Hiland Partners v. National Union Fire Insurance Company the operator, an additional insured under a contractor’s commercial general liability insurance policy, was deprived of coverage – and a duty of the insurer to defend. We’ll get to the lessons.  But first, …

The accident

Hiland owns a gas processing facility in North Dakota and had an MSA with Missouri Basin under which MB would provide services. MB procured the insurance policy and included Hiland as an additional insured. As always, the insurer had a duty to defend. There was an exclusion in the policy for bodily injury arising out of the discharge, release, etc. of pollutants, which were defined as any “solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acid, alkali, chemicals and waste”.

Am MB employee was removing water from a condensate tank when the tank overflowed, causing a fire that seriously injured the worker. Because of the exclusion, there was no coverage for Hiland under the policy. And now, …

The lessons

Should Hiland have adjusted language in its MSA to protect itself? I don’t see how it could have. They made themselves an additional insured. The problem was with the policy exclusion. Everybody (whether contractor or operator) must be diligent in confirming that liability insurance coverage tracks – and covers – the liabilities and obligations in the MSA. But here’s the problem: It was MB’s policy. How may additional insureds study the other guy’s policy? I venture to say not many.

Then there was an administration problem: The insuror’s duty to defend was nullified by Hiland’s failure to give the court evidence that it reported the pollution claim to the insurer within 21 days of discovering it – the deadline required in the policy. Timely reporting would, perhaps, have established an exception to the exclusion. Was notice not given, or did Hiland just didn’t show it to the court? The opinion doesn’t say.

Why the exclusion applied

The definition of pollutant is not subject to strict technical usage so the court – as it should – went to the dictionary. A pollutant is something that irritates, or causes irritation, … or contaminates. The injured worker’s suit described condensate as flammable, volatile and explosive.  Cases discuss petroleum products being toxic by nature. The fact that condensate caused harm other than by contamination and is a product that causes harm in a manner other than by irritating or contaminating, didn’t matter to the court.

The court rejected Hiland’s argument that the condensate caused harm in a manner other than by contamination and thus the exclusion did not apply, and rejected the argument that condensate is not a “pollutant” under the exclusion because Hiland is in the business of selling condensate, which makes it a product.

For today’s musical interlude, more girl singers you need to know about: A black, guitar-playing, gospel singer who was around so long she’s no longer around, and a more recent underappreciated country singer.   

 

 

judicial-activistFirst, a promise: I won’t report on another arbitration case until there is more to say than “business as usual”. Second, an opinion: Arbitration is still the right forum in many situations. Third, remember: An award and a result, not litigation, was what Venoco says it bargained for.

That said, knowing only that Denbury Onshore v. Texcal Energy South Texas is an appeal of an arbitration award in Texas, you can predict the outcome. The award was confirmed.

How to vacate an award

The bases for vacating awards are similar under the federal and the Texas arbitration acts. Generally an award must have been procured by:

  • corruption, fraud or undue means,
  • evident partiality or corruption,
  • arbitrator misconduct (willful misbehavior),
  • refusing to postpone the hearing for sufficient cause,
  • refusing to hear material evidence,
  • other misbehavior that prejudices a party’s rights, or
  • the arbitrators exceeded their powers or so imperfectly executed them that a final and definite award was not made.

I’m conflating the two statutes.  They aren’t identical but the result is the same: vacating an award is difficult.

The dispute

Denbury had an option to purchase Venoco’s interests in the Hastings Field. After Denbury achieved payout, Venoco would receive a 25% back-in. Payout was dependent on Denbury’s “CO2 costs”, the direct costs of acquiring (commodity costs) and delivering (transportation costs) CO2.

A three arbitrator panel unanimously declared the meaning of the disputed language of the agreement and issued an award in Venoco’s favor.

Denbury sued to modify and vacate the award for:

  • insufficient evidence,
  • the arbitrators exceeded their authority by making an incorrect value judgment on the contract clause,
  • manifest disregard of the law (in essence, they construed the contract incorrectly), and
  • the parties had contracted for judicial review.

Denbury’s hurdles

All reasonable preferences are indulged in favor of the award, and review of an award is extraordinarily narrow.

Denbury argued that the parties contracted to expand judicial review for reversible error: “An appeal from an order or judgment of the panel shall be taken in the manner and to the same extent as some orders or judgment in civil cases under Texas law.” This was not a clear enough agreement to invoke the appellate process to correct reversible error by the panel.

Did Denbury get what it bargained for?

Under the TAA and FAA an arbitrator exceeds his authority only when he disregards the contract and dispenses his own idea of justice or when he strays from the delegated task of interpreting the contract, not that he performs that task poorly. The panel’s 13-page detailed award satisfied the contractual requirement that the award provide evidentiary references. The award was not so irrational or devoid of authority that the panel was merely dispensing its own idea of justice.

The court concluded that Denbury’s complaint was nothing more than a dispute as to the correctness of the panel’s construction of the provision and an effort to re-argue the merits of the case. Don’t be so sure. I could believe that Denbury believed it could appeal but failed to write the provision clearly enough.  Think about that the next time you write such a provision Better yet: why arbitrate if you can appeal?

A proposal

Let’s criminalize vacuous and inept cultural appropriation. If we were to do that, here is a victim and a misdemeanor. And here is a victim and a major felony. Write your Congressperson.

nightmareYou might conclude that the but-for-the-grace-of-God-that-could-be-me nightmare presented in In re: RPH Capital Partners is instructive only for lawyers. If so, you would be mistaken. The lesson: If you want to win the lawsuit, pay attention to pesky legalities such as notices of trial settings. Likewise, if you want to protect your hydrocarbons, reinforce your people and processes for maintaining leases and other significant obligations.

RPH sued Peridot and others for failing to make payments under a participation agreement and for selling interests in properties they didn’t own. The defendants didn’t appear for the trial.  A default judgment for $13 million was taken.

After RPH began garnishing bank accounts Peridot filed a petition for bill of review, contending it never received a copy of the judgment. Peridot had only 38 days’ notice of the trial (the law requires 45), so Peridot argued it was deprived of its due process rights.  The trial court ordered a new trial.

Everyone agreed that Peridot did not receive enough notice of the trial, but was the notice so insufficient that it was a violation of fundamental due process rights? No. Peridot waived that complaint when it took no action after it received less than 45 days’ notice.

The case then turned to whether Peridot’s failure to appear was not intentional or the result of conscious indifference, but was due to mistake or accident.  The court never got to whether there was a meritorious defense.

To prove that the failure to appear was not intentional or the result of conscious indifference there must be “some excuse, although not necessarily a good one.”  Forgetfulness alone is insufficient, but excuses that are acceptable are, for example, bad weather and misplacing the citation due to staff turnover.

Peridot’s counsel “did not see” the trial setting and no one in the office docketed the trial date. The deficiency in counsel’s affidavit was that it didn’t explain the failure to appear at trial and offered no description of circumstances that could explain why he took no notice of the trial date.  Finally, the affidavit failed to address other instances showing Peridot had notice of the trial date. Peridot did not establish that its failure to appear was not intentional or a result of conscious indifference.

What does this have to do with me?

The lesson for the lawyer is obvious. What if you run a land department?  You should be good to go if you have people and processes in place to assure that obligations such as delay rentals and royalty payments are made. And while you’re at it, who is paying attention to debilitating lease provisions (the ones the lessor would never even consider enforcing, until he does), such as lease termination for failure to timely pay royalties?

Musical interlude: For the trial judge who has been reversed.

omegaAre Louisiana courts as enamored with arbitration as their Texas counterparts? Looks like it. East of the Sabine, submitting your dispute to arbitration means you are pretty much saying adieu, farewell and bye-bye to a judicial mulligan.

In ExPert Oil & Gas, LLC v. Mack Energy Co., et al an arbitrator’s mistaken calculation did not nullify an arbitration award.

Round one

ExPert was the operator under a participation agreement and JOA. An audit of the joint account found that some expenditures were unauthorized and should be repaid. Neither party agreed with the auditor’s report and the matter was arbitrated. After an eight day hearing the arbitrator rendered a reasoned award ordering ExPert to credit $1.5 million to the joint account.  The district court, First Circuit, and Louisiana Supreme Court confirmed the arbitration award.

The real issue

After the Supreme Court affirmed the judgment confirming the award, the arbitrator revealed “that he committed gross professional negligence when performing the calculation of three categories of credits in the arbitration award” (so said ExPert). Those credits totaled $434,000. Never shirking a good fight, ExPert sued, alleging that the judgment was a relative nullity because of “ill practices”, referring to the arbitrator’s admission of his mistake. Accepting all facts in the petition as true, the question was whether ExPert was legally entitled to relief.  A judgment may be annulled by fraud or ill practices but not for mere error. La. Code Civ. P. 2004(B) is sufficiently broad to encompass all situations in which a judgment is rendered through an improper practice or procedure.

“Ill” practices?

Ill practices includes any improper practice or procedure which operates, even innocently, to deprive a litigant of a legal right. There are two criteria to determine whether a judgment was obtained by actionable fraud or ill practices:

  • The circumstances under which the judgment was rendered showed the deprivation of legal rights of the litigant seeking relief; and
  • Enforcement of the judgment would be unconscionable and inequitable.

The punch line

The court declined to vacate the award: By substituting arbitration for litigation, the parties are presumed to accept the risk of procedural and substantive mistakes by the arbitrator of either fact or law, which are not reviewable by the courts. ExPert failed to state a cause of action for nullity of the original judgment.

Questions, observations and one thing to ponder

  • Would the result have been different if the error had been presented during round one? The reasoning suggests it would not, but the court doesn’t say.
  • Could the error been discovered sooner, especially with a reasoned award?
  • If the amount in controversy allows, go with three arbitrators for a better chance of an error-free award.
  • Despite this unfortunate result, arbitration has its advantages.
  • Should Mack have just acknowledged the injustice and agreed to return the $435,000? Would you?

A musical interlude for the case.

And one for Christmas Advent.

dylanIf you’ve ever tried to escape penalties for the operator/producer’s failure to comply with La. R.S §30:103.1 and §103.2, take comfort in XXI Oil & Gas, LLC v. Hilcorp Energy Company.  You are not alone. No excuse has satisfied the courts, and there is none here.

The statutes (links above) require information and certain procedures to be followed by an operator before it can recoup costs of unit drilling operations from an unleased mineral owner. Of particular importance is a detailed sworn statement of costs of the operation and a statement of revenues.

The events unfold

XXI was the lessee of leases comprising 20% of a drilling unit; Hilcorp was the operator.

  • 1/11/11-Hilcorp recompletes a well in the drilling unit and begins producing.
  • 2/11/11-XXI acquires the leases.
  • 4/21/11-XXI sends a letter by certified mail requesting the information required by Section 103.1.
  • 4/21/11-Hilcorp sends XXI an AFE itemizing estimated costs to recomplete the well but including no revenue information.The accompanying letter explains that the unit well had been shut-in and would be returned to production shortly.
  • 5/20/11-XXI elects to participate in the recompletion and signs the AFE as “participant”. .
  • 6/13/11-XXI sends Hilcorp a second letter stating that because Hilcorp failed to provide the statement required by the statute, it could not deduct the cost of recompleting or operating the well from XXI’s revenues.
  • 9/9/11-XXI sues, seeking penalties for failure to comply with the statutory reporting requirements.

Summary judgment was granted for XXI on the basis that Hilcorp did not comply with the statutes.  The statement of costs was neither sworn nor detailed.

Hilcorp appealed, admitting it did not comply with the technical requirements of the statute but asserting that it achieved the intent and purpose the statute by submitting a statement of cost with the AFE. Hilcorp argued that XXI’s position was weakened because it elected to participate in the well after receiving the AFE.

Judgment affirmed

The court of appeal upheld the trial court’s judgment against Hilcorp. Here is the reasoning:

  • Whether the leases had been validly executed by owners of each tract was not relevant to issue of whether operator forfeited its right to demand contribution. Hilcorp offered no authority supporting the proposition that validity of the underlying leases is a required element for the statute to apply.
  • The producer forfeited its rights to demand reimbursement by submitting an unsworn statement of costs.
  • The statutory provisions were subject to strict construction.
  • Where the statute is unambiguous it is not the court’s role to determine the purpose of the statute. “Detailed” is unambiguous.  The text of the statute does not invite an inquiry about its purpose.

REVISION: What’s new about this opinion?

An observation that didn’t make its way into the original post is the court’s application of the statute to a lessee of a mineral owner who did not have a lease with the offending operator.  Prior to this case that was an unanswered question.

Obvious musical interlude

Hey, you of a certain age, sitting in your 60’s and 70’s dorm room you thought “literature” wasn’t what you were doing. Think again. Here are a few good ones from our Nobel Prize winner (from Youtube’s slim pickins):

the acoustic love song Bob

the acoustic protest song Bob

the electric-for-the-first-time song Bob

 

judgeGemini Insurance Company at al v.  Drilling Risk Management Inc construed control-of-well and redrill/extra-expense provisions in an insurance contract.

The question and the rule

The question was whether an insurance policy covered post-blowout expenses (see facts below), and whether each blowout constituted a separate “occurrence”? If so, there would be two deductibles. The rule is simple: An insurance policy is a contract of indemnity whose scope is limited to that expressly set forth in the agreement.

Gemini denied coverage under the contract. The trial court granted summary judgment in favor of DRMI on the coverage and deductible issues. On appeal, the insurer’s denial of coverage was vindicated. Post-blowout casing and liner and associated expenses were required because of pre-existing hole conditions, not as a result of a well-control incident.

Rather than delve into the minutiae of the policy and the events, none of which would be helpful in your next insurance dispute, be reminded not to read too much into the meaning of one agreement. As with any contract, the meaning of an insurance agreement must be determined by the language of the agreement itself.

The facts

While drilling, DRMI encountered a kick in an unexpected high-pressure zone, resulting in uncontrolled subsurface flow. DRMI sidetracked the well, and encountered a second unexpected weak zone at a depth below the original blowout, resulting in a second underground blowout.

A second sidetrack was unsuccessful, never reaching the depth of the second blowout. DRMI drilled a third sidetrack and installed casing and a liner to isolate the zones that caused the second blowout. This one was drilled to total depth. DRMI sought coverage under the policy and a determination that there was one “occurance”.

Beware, home-town justice

Another issue is presented in this case, which was tried in Kendall County, Texas, in the 216th Court (County  Court at Law judge presiding). The plaintiff sued in its own county rather than the county of the defendant or the location of the events (Houston or Louisiana). After denying a motion to transfer venue, the trial court granted partial summary judgment, construing the contract in favor of the hometown plaintiff.  This put the defendants to trial with their case essentially gutted. The result was a $9 million+ judgment for plaintiff. The trial court got it wrong, ignoring testimony from hometown witness, DRMI president Alan Bloxsom, that undermined the company’s contentions.

To be sure, all trial courts don’t favor the homies. The other good news for the visiting team is that the appellate court can set it right. Full disclosure: Gemini drew my attention because I represented a party in the same court in a case with similar players, similar events, and a similar result.

Musical interlude

Yo, Republicans! Do you yearn for the Republican Party you used to know? The one that existed before the 2016 primaries, or during the time of the Bushes, or Reagan, or Ike, Rockefeller and Lincoln? Cookie and the Cupcakes share your pain.

unhappy partyLongoria v. ExxonMobil is like throwing a big party but failing to invite all the right guests.

The Longorias – 59 of them – sued producer-defendants over ownership of 9,200 acres in Brooks County, Texas, acquired in the 1800’s. Plaintiffs claimed their ownership was not recognized in subsequent conveyances and judgments and sought an accounting, damages for conversion of their share of production, to quiet title, and to declare their ownership in the mineral estate.

Trouble for the Longorias

Plaintiffs identified 82 absent interest owners as “Necessary, Nominal Parties” – let’s call them the “uninvited” – but did not join them as defendants. Facing motions to abate and to dismiss, Longoria claimed the uninviteds were not necessary because there was no claim against them. But their pleadings made claims on their interests. The court denied that argument.

Alternatives to joinder and service

Longoria offered to pay the unserved interest owners amounts equal to the royalty paid by the producers for as long as production continued.  Like a party favor for not even being invited. The court dismissed that rationale. If the plaintiffs won the suit the producers’ interests would be diminished. The “uninvited” wouldn’t be bound by the judgment, and could continue to look to the producers for payment of 100% of their royalty.

How long is long enough?

Longoria argued that they served 57 of 64 absent owners (producers argued it was fewer) and weren’t allowed sufficient time to locate and serve the others.  Observing that they had been given nine months to accomplish this task, the court concluded that the Longorias, having made half-hearted efforts at service, were not diligent in pursuing the unserved interest owners.

To understand this result, you need to know that this dispute is the progeny of a suit originally filed in 2004. In a 2008 opinion this same court dismissed that suit on the more or less same grounds as this one, but without prejudice, giving the Longorias another chance to assemble the proper guest list.  Looks like the court finally invoked a judicial curfew, sending everybody home.

Finally, Longoria asked the court to allow substituted service on the unserved defendants.  The denied the motion. It was late and was defective because it was not supported by an affidavit. Even new affidavits filed with a motion for new trial were insufficient because they stated conclusions with no supporting facts.

The takeaways

  • A suit is likely to be dismissed if all parties whose interests could be affected by a judgment are not before the court.
  • Left unsaid in the opinion is that if a party is deliberate in refusing to do what the court orders, the court’s patience will eventually run out, with unpleasant results. In this case, 12 years was enough.

A musical interlude, dedicated to the Longorias’ empty feeling as the producer-defendants and the court of appeal leave the party, hand in hand.