Golden Eagle Resources II LLC v. Rice Drilling D LLC. presents a small step in the development of subsurface trespass law in Ohio. The federal court considered a motion to dismiss, in which it evaluated the sufficiency of the complaint to state a cause of action. Such a motion is not a challenge to plaintiff Golden Eagle’s factual allegations. The causes of action were trespass and conversion.

Golden Eagle owns mineral rights in two tracts in Belmont County, 11.456 acres and 7.47 acres. Rice owns leasehold rights in the Marcellus Shale and Utica Shale. Minerals from the surface to the top of the Marcellus, between the bottom of the Marcellus and the top of the Utica, and below the base of the Utica were excluded from the lease. Rice drilled the “Big Tex” well, which is in the Big Tex 6 drilling unit. The unit overlaps with the entirety of the 7.47 acres and 9.05 of the 11.456 acres. Rice produces gas from the “Utica/Point Pleasant formations”. The Point Pleasant is below the Utica and not covered by the lease.

Trespass

Under Ohio law a trespass is an interference or invasion of a possessory interest in property. An entity is liable for trespass if it intentionally enters upon land in the possession of another or causes a thing or third person to do so. Landowners’ rights include the right to exclude invasions that actually interfere with their reasonable and foreseeable use of the subsurface.

The interest at issue was the Point Pleasant formation. How Rice invaded the property was the question. The Big Tex wellbore did not pass under Golden Eagle’s tracts, so there was no physical trespass with the drill bit.

Golden Eagle alleged trespass by Rice’s improper pooling. The court concluded that Ohio law does not hold that improper pooling into a drilling unit constitutes a trespass.

The central question was whether Ohio law recognizes a trespass by subsurface injection of frac fluids into the Point Pleasant formation. Rice relied on the so-called “negative rule of capture” allowing a landowner to inject into a formation substances which then migrate through the structure of the land to the land of others even if it results in displacement under such land. Ohio courts have not accepted that doctrine, said the court.  

Rice also argued that even if a claim for subsurface injectate is cognizable, it will fall short without allegations of physical damage or interference with use, assertions that were not in the complaint. Golden Eagle admitted that it did not specify the nature of the alleged physical invasion.  The trespass claim fell short of the federal pleading standard and Golden Eagle was given 14 days to amend its complaint.

Conversion

Golden Eagle alleged that Rice wrongfully converted oil and gas produced from the Point Pleasant formation that should belong to Golden Eagle. Ohio courts have held that the rule of capture does not apply to drainage or seepage of natural gas caused by the injection of frac fluids onto into another’s property. The court cited Briggs v. Southwestern Energy. The court concluded that the sparse Ohio case law on this topic recognizes a conversion claim predicated on natural resources that have been acquired by fracking that invades the plaintiff’s property. That is what Golden Eagle alleged and thus it adequately stated a claim for conversion.

Caveat

It might not matter. The case has been stayed pending a motion for summary judgment ruling on a related case.

Your Jazz Fest warmup musical interlude

As you negotiate your master service agreements are you confident that you know how insurance choices might affect indemnity obligations? Me neither. That’s why I turn to my Gray Reed partner Darin Brooks and his insurance coverage lawyers. I didn’t consult them about this post so all errors are on me, not them.

A basic principle of Texas insurance law is that a separate contract may be incorporated by reference into an insurance policy only if that reference is clearly manifested in the terms of the policy itself.  A court will consult the separate contract only to the extent that the policy requires it.

The question in Exxon Mobil v. National Union Fire Insurance Company was whether an insurance policy incorporated payout limits in an underlying service agreement. It did not.

The facts

Savage Refinery Services was an independent contractor at the Exxon refinery in Baytown. In the service agreement Savage promised to obtain at least a minimum stated amount of liability insurance for its employees and to name Exxon as an additional insured. Fulfilling its obligation, Savage procured five different insurance policies. Two Savage employees were severely burned in a workplace accident, sued Exxon for compensation for their injuries, and settled for $24 million. $5 million was paid from Savage’s primary insurance policies. National denied Exxon coverage under an umbrella policy. Exxon sued for breach of contract.

Summary judgments were heard on the question of Exxon’s status as an insured under the umbrella policy and whether the Exxon-Savage service agreement otherwise limited Exxon’s entitlement to further policy proceeds.

The Court’s reasoning

The policies defined “Insured” as “any person or organization, other than the Named Insured, included as an additional insured under Scheduled Underlying Insurance, but not for broader coverage than would be afforded by the Scheduled Underlying Insurance.”

The first question was easily resolved: National had recognized Exxon as an additional insured under its primary policy. The primary policy was incorporated for the limited purpose of identifying who was an insured.

The real inquiry was invited by the umbrella policy’s reference to the primary policy. The umbrella policy disclaimed “broader coverage” than what the primary policy offered. Exxon was not demanding broader coverage. It sought only the same coverage as the primary policy but at the umbrella policy’s higher limits because the primary policies had been exhausted.

National Union argued that the limit on “broader coverage” invoked payout limits of the service agreement, but the umbrella policy did not say anything about the service agreement’s payout limits.

To the extent it could read the umbrella policy to reference the service agreement, the Court found no limits that the umbrella policy could adopt. The primary policy had its own payout limits, which was the very reason that the parties needed an umbrella policy. Interpreting “broader coverage” to refer to payout limits would give the umbrella policy a self-defeating meaning.  An umbrella policy springs into action only when the primary policy is exhausted. To conclude that “broader coverage” referred to payout limits could be the result only if the language the parties use clearly required it. There was no such language here.

The Court considered conventional usage of the words “coverage” and “umbrella insurance”. The former contemplated the risks covered, the latter was triggered only by reason of the limits under other policies. Coverage does not include payout limits in this context. The umbrella policies provide greater limits for risks already covered by primary policies.

The Court of Appeals’ decision in National’s favor was reversed and the case remanded.

Your musical interludes, sponsored by GM … and Ford …

MIECO, LLC v. Pioneer Natural Resources presented a challenge to a force majeure defense in a dispute arising from Winter Storm Uri. The defense carried the day.

MIECO agreed to purchase 20,000 MMBtu/day of natural gas from Pioneer. Pioneer delivered residue gas from the tailgate of a Targa processing plant to two points near the border of Arizona and California. If Pioneer experienced a shortfall, it purchased gas on the spot market to cover.

From February 14 to 19, 2021, Pioneer failed to deliver the full amount of gas it contracted to deliver.  To fulfill its obligations to its own customers MIECO reallocated gas it had contracted to purchase for other purposes two days earlier. On February 16, Pioneer sent a notice of force majeure dated February 15. On February 16-19 Pioneer delivered no gas and MIECO purchased gas on the spot market. During this period Pioneer made no effort to purchase replacement gas. Pioneer resumed daily delivery on February 20 until March 1 when it was short again. Pioneer withdrew its force majeure declaration two days later.

The contracts (substantially redacted)

11.1. (as amended) … “Force Majeure” … means an event or circumstance which prevents one party from performing its obligations under one or more Transactions, which event or circumstance was not anticipated as of the date of the Transaction was agreed to, which is not within the reasonable control of, or the result of the negligence of, the claiming party, and which, by the exercise of due diligence, the claiming party is unable to overcome or avoid or cause to be avoided.

11.2. Force Majeure shall include … weather related events affecting an entire geographic region, such as low temperatures which cause freezing or failure of wells or lines of pipe …. Seller and Buyer shall make reasonable efforts to avoid the adverse impacts of a Force Majeure and to resolve the occurrence once it has occurred in order to resume performance.

11.3. Neither party shall be entitled to the benefit of … Force Majeure to the extent performance is affected by … loss or failure of Seller’s gas supply …

MIECO sued for $9MM+ in damages for the cost to cover gas not delivered by Pioneer.

In cross-motions for summary judgment Pioneer argued its nondelivery was excused by the force majeure provisions of the contract because it lost its gas supply due to low temperatures that affected the entire region.

Force majeure wins

MIECO argued three reasons why Pioneer’s facilities were not covered, none of which the Court found persuasive.

Caveat: For the most part, New York law applied in this Texas case.

First: the event must render performance literally impossible, citing a dictionary definition of “prevent”. But “prevent” also has other meanings (look it up). To require impossibility would render portions of the force majeure provisions superfluous, including the requirement that the claiming party was unable to overcome or avoid the event by exercise of due diligence.

Force majeure ordinarily excuses a party’s performance only if the clause specifically includes the event that actually prevents performance. Citing Ergon W. Va. v. Dynergy, a Texas case, the Court reasoned that to require a party to be unable to perform by force majeure if it could still purchase gas on the spot market would render the force majeure provision essentially meaningless because it would mean that a seller could never invoke force majeure so long as there was some gas available anywhere in the world at any price. That would lead to an absurd result.

Second: Pioneer lost only its preferred source and that is not force majeure because the contract provides only for price, amount, and delivery point. But the contract specifically mentioned Pioneer’s gas supply. The availability of other supplies did not bar a force majeure defense.

Third, the contract did not define the gas supply to be delivered. Under MIECO’s definition, if there were no available gas anywhere in the world at any price with which Pioneer could meet its contractual obligation it would still be liable for non-delivery unless 11.2 was met.  Pioneer’s “gas supply” is the gas it received from the Targa plant. This avoids the same absurd result. And use of the possessive “Seller’s” suggests the gas supply is owned or possessed by Pioneer, something which cannot be said of the spot market.

The court excused Pioneer’s failure to perform, granted Pioneer’s motion and denied Mieco’s breach of contract claim.

Your musical interlude

Co-author Caleb White

In a recurring theme, harmony and the four-corners rule were front and center in Citation 2002 Inv. LLC et al v. Occidental Permian, Ltd. et al, a case of competing claims over the granting language in an assignment of oil and gas leases.  Occidental (Oxy) claimed assignor Shell Western reserved mineral interests at certain depths from a conveyance to previous assignee, Citation, and that those reserved interests were later assigned by Shell Western to Oxy.  Citation, on the other hand, claimed there was no reservation of deep rights.

The instruments

  • 1987: Shell Western sells a large acreage position to Citation for $75 million. To effectuate the transaction the parties execute a purchase and sale agreement, incorporated into which are two other documents, a Shell-to-Citation Assignment, and an attached Exhibit A. The Assignment includes two key phrases. First: the conveyance is of all of Shell Western’s interests described in Exhibit A. Second: a subject-to clause stating the intent of Shell Western to convey all its rights and interests, regardless of whether the interest is accurately described in Exhibit A. Exhibit A describes the properties to be conveyed; some descriptions include references to depth, some do not.
  • 1997: Shell Western purports to transfer to Altura (n/k/a Oxy) the deep rights in some of the properties previously conveyed to Citation.
  • 2006 Citation assigns to Endeavor some of the properties acquired from Shell Western.
  • 2019: Oxy assigns some of the interests from the Shell-Altura assignment to Rodeo.

These conveyances led to competing trespass-to-try-title claims over the deep rights in two consolidated suits. The trial court agreed with Oxy and found that the original Shell-to-Citation Assignment was depth limited and as a result Oxy had acquired the deep rights.

Harmony and the four corners rule

The Court of Appeals’ task was to determine whether the Shell-to-Citation Assignment was depth-limited, conveying only certain shallow rights to Citation, or if the Assignment was an unlimited grant of all depths. The Court determined that the Assignment was unambiguous despite the competing interpretations, and limited the scope of its analysis to ascertaining the intent of the parties from the four corners of the instrument.

When analyzing multiple documents in one instrument, the Court will examine the entire instrument, seeking to harmonize and give effect to each provision. In harmonizing the Assignment and Exhibit A, the Court focused on the granting clause, the subject-to clause, and the lack of limiting language. Because Exhibit A contained only references to depths and had no limiting language, the Court determined that Exhibit A provided relevant information but was not intended to preclude Shell Western from transferring all its interests to Citation. Further, when Exhibit A was combined with the subject-to clause, the express intent of parties was for Shell Western to convey all its interests to Citation. In the words of the Court, “all means all.” 

The Court reversed the trial court’s summary judgment, vacated the declaration that the Assignment conveyed only certain shallow rights to Citation, and remanded the case for further proceedings.

Your musical interlude

Co-author Caleb White*

Davis v. COG Operating, LLC, in construing a Warranty Deed with a reservation of minerals, applied the estate-misconception doctrine and denied the presumed grant doctrine. At issue were three instruments:

  • A 1926 mineral lease from the Sesslers to Campbell.
  • A 1926 “Royalty Deed” from Sesslers to Haun.  
  • A 1939 Warranty Deed from the Sesslers to Roberts, in which the parties acknowledged that Haun had been conveyed 1/32 of the minerals.The conveyance did not include that interest. The Sesslers reserved “one fourth (1/4) of the 1/8 royalty usually reserved …” in an oil and gas lease.

Davis (Sesslers’ successor) sued the Neals and COG (Roberts’ successors) for trespass-to-try-title and a dog’s breakfast of other claims – 11 in total – asserting that she owned a portion of the Neals’ NPRI.  The trial court granted summary judgment for the Neals. Having denied Davis’s trespass-to-try-title claim, the court denied Davis’s remaining claims.

The appeal

The Court of Appeal concluded that the 1926 “Royalty Deed” actually conveyed a 1/32 mineral interest, as the deed did not strip away any traditional mineral rights from Haun.  The 1/32 in the deed was the conveyance of 1/4 of the remaining typical 1/8 reserved by the Sesslers as a result of their lease to Campbell.

Davis argued that the 1926 Deed put Roberts on notice of Haun’s preexisting interest in the mineral estate. The Neals responded that the Sesslers and Roberts intended a literal meaning of the 1/32 fraction and consequently, Roberts was not put on notice of the extent of Haun’s ownership. The Court did not accept the Neals’ argument.

The intention of the parties in using 1/32 in the 1939 Deed to identify what was reserved to Haun depended on whether they were operating under an estate-misconception. If they were not, then the Sesslers failed to provide adequate notice to Roberts of the interest previously conveyed to Haun. If they were, both parties would have understood that the 1/32 was simply a stand-in for the 1/4 mineral interest conveyed to Haun.

The Court concluded that the parties had been operating under estate-misconception, relying on three reasons:

  • 1939 was the height of the time estate-misconception was prevalent.
  • 1/32 is the product of multiplying 1/4 by 1/8, creating the expectation of a 1/8 lease (citing Hysaw v. Dawkins).
  • The double fraction found in the reservation links the reservation to estate-misconception.  

Considering those factors and harmonizing the Deed’s provisions, the Court determined the parties executed the 1939 Deed under an estate-misconception.

The deed effectively put Roberts on notice of the 1/4 interest in the mineral estate previously conveyed to Haun. The intent of the parties was to give Roberts notice of the previous transfer to Haun.

The Neals argued that even if the 1939 Warranty Deed reserved a 1/4 NPRI to the Sesslers, the reservation was ineffective. First, the 1/4 floating NPRI was an over-conveyance because they had already sold the same 1/4 interest to Haun. In such a case, the Duhig doctrine directs courts to make the grantee whole by awarding the missing title to the grantee out of the grantor’s remaining estate. The Court rejected this argument because the Sesslers did not convey more than they owned. The 1939 Deed did not purport to convey a 3/4 interest in future royalties to Roberts.

The Court denied Neals’ presumed-grant doctrine defense. It is an equitable doctrine that applies only in the case of a gap in title. And laches does not apply to a trespass-to-try-title claim.

The trial court erred in granting summary judgment for the Neals because the Sessler successors had clear title to a portion of the Neals’ NPRI. The Court reversed the summary judgment, rendered judgment on trespass-to-try-title in favor of Davis, and remanded the remaining claims to the trial court for further proceedings.

Your post-St. Patrick’s Day musical interlude.

*Caleb is a 3L at Baylor Law School and a Gray Reed intern.

In Devon Energy Production Company, LP et al v. Sheppard et al, the Supreme Court of Texas construed what it referred to as a “bespoke” and “highly unique” royalty clause in several oil and gas leases to prohibit the producers from deducting out of the lessor’s royalty post-production costs incurred downstream of the point of sale to unaffiliated third parties.

The provisions (redacted; read them yourself):

The royalty clause

Under 3.(a) and 3.(b), : Lessor’s royalty was 1/5th of the gross proceeds realized from sales.

3.(c): “If any … sale of oil or gas shall include any reduction or charge for the expenses or costs of … [specified PPC’s] … then such deduction, expense or cost shall be added to . . . gross proceeds so that Lessor’s royalty shall never be chargeable directly or indirectly with any costs or expenses… .”

Addendum L: Payments of royalty … shall never bear or be charged with, either directly or indirectly, any part of the costs or expenses of …  [specified PPC’s], post-production expenses, marketing or otherwise making the oil or gas ready for sale or use, …” 

The terms of L were controlling over 3.(c).

The general rules …

The court reiterated the rule that unless agreed to the contrary, the lessor shares in the burden of PPC’s, and proceeds leases ordinarily authorize the lessee to deduct from royalties PPC’s incurred after the point of sale to an unaffiliated third party.

However, the Court also reiterated the rule of contract construction that unambiguous contracts in Texas will be enforced according to the plain language of the instrument.  

… applied to this case

The court construed the royalty provisions as requiring an “add back”, and the key provisions in the lease plainly required that certain sums be “added to” the producers’ gross proceeds for royalty calculation purposes. The cost at issue was an $18 per barrel deduction for the buyer’s anticipated post-sale costs for “gathering and handling, including rail car transportation.” The producers did not add the $18 to the royalty base.

The question was not whether a buyer’s PPC’s were gross proceeds under the leases or the law. They weren’t. The question was whether the leases nonetheless required the producers to pay royalty on those costs. The broad language in paragraph 3.(c) was clear in requiring any reduction or charge for PPC’s that were included in the producers’ disposition of production to be added to gross proceeds so that the landowner’s royalty would never bear those costs, even indirectly. The leases contemplated royalties payable on amounts that may exceed the consideration received by the producers.

The Court denied the producers’ assertion that paragraph 3C was surplusage because the payment of royalty on non-proceeds is so at odds with the usual expectations that it could not be required unless such an intent was stated plainly and in a formal way, The court agreed that for continuity and predictability of oil and gas law the courts should construe commonly used terms in a uniform and predictable way; however, there was nothing usual or standard about the language in 3(c), which was clear in expressing the intent to deviate from the usual expectations.

The Court also denied the producer’s argument that leases’ references to Heritage Resources and Judice was surplusage.

There was some relief for the producers.  The lessors didn’t challenge the trial court’s summary judgment for the producers on:

  • adjustments for volumes of gas used for the producers’ operations and never sold;
  • adjustments for volumes of production deemed to be lost or unaccounted-for by third parties; and
  • value retained by the producers as a result of contractually fixed recovery factors. 

The dissent

Justice Blacklock dissented, reasoning primarily that the transaction between Devon and the purchaser did not involve a reduction or charge from PPCs that reduced the proceeds received by Devon or the royalty received by the royalty owners.  It is an accounting gimmick when Devon is required to pay an inflated royalty just because it left behind a paper trail indicating that it calculated its initial sales price with reference to a downstream market.

Your musical interlude

With it being Lent and all, we ask, are this year’s Ferrymen of the River Styx using these 40 days to turn from wickedness and find their way to repentence? Who knows, but we do know that as alternative energy rises, so do associated grifters, frauds and thieves. And political malpractice is a new category.

Break like the wind

Perps: Joey Douglas Davis and Philip Vincent Ridings of Arkansas

Crimes: fraud, wire fraud, aiding and abetting wire fraud, money laundering, aiding and abetting money-laundering

How they did it: Told investors that the money would be used to build a prototype wind turbine and develop wind farms in Iowa and other states. Told investors the Department of Defense expressed strong interest in acquiring the perps’ wind turbines for use in combat zones and there was a $10 million grant from the DOE.  It was all a lie. They used most of the $700,000 from investors for personal use and the turbines and farms were never constructed.

Sentences: 180 months and $1.138 million in restitution for Davis; 97 months and $1.138 million for Ridings.

A recidivist flies too close to the Sun

Perp: Michael James Sweaney

Charge: One count of mail fraud

How he did it: A Californian, previously convicted of securities fraud in Nevada using a different name, Sweeney scammed $9.5 million in a fraudulent solar power scheme. He would cold-call investors to convince them to invest in Nanotech Engineering Inc., claiming he had created a compact “nano panel” (which does not exist) using “technology” that could generate triple the amount of electricity as traditional solar panels. He used the purloined funds for the traditional lavish lifestyle, including a 46 foot yacht, two Maseratis, gold, a Cartier watch, and cosmetic surgery.

The scam was elaborate. Sweeney and his nephew created a fake prototype to show investors and hired an actor to demonstrate the nanopanel “outperforming” other panels.

Sentence: Six and a half years in prison and seizure of $1.5 million

No thank you for your “service”

Perp: Derek Robert Hamm

Crimes: 33 counts of wire fraud, money laundering, violations of the federal Stolen Valor Act, a felon in possession of guns and ammunition. Pled guilty.

How he did it:  In order to lure invetors in a oil field service company, used a fake military discharge certificate, claimed to be a former member of the Army Special Forces serving multiple tours in Iraq, Afghanistan and other countries; falsely claimed to have a Purple Heart, Silver Star, and Bronze Star; and claimed to be wealthy. He spent $500,000 of investors’ money on personal gifts including jewelry and vehicles.

Sentence: 180 months and forfeiture of $625,000.

Penalty = 12x the bribes

Perp: Swiss commodities company Glencore PLC

Crimes: Seven counts of bribing African officials to gain access to oil.

How did they do it: The company authorized (not merely prevented) spreading $29 million worth of bribes across our oil operations in several African nations in order to secure preferential access to bigger cargoes, more valuable grades of oil, and preferred delivery dates. The payments were concealed as an unspecified service fee, signing bonus, or success fee. Lots of cash was flown by private jets to Cameroon and South Sudan from 2011 through 2016. The firm says it has taken significant action to build a new ethics and compliance program.

Punishment: Ordered by a UK court to pay $314 million as a penalty and the profits from the bribes, the biggest penalty ever handed out for corporate criminal conviction in UK history

Inflation of another sort

Perp: Christopher Russell Bentley

Crime:  One count of fraud.

How he did it: From 2019 through 2021 in managing different oil and gas mineral rights investment funds he allegedly inflated the value of the rights to be sold to investment funds and used their money to obtain a loan of $6.5 million for personal benefit and to fraudulently obtain $3,972,000 from investors.

Punishment:

You can’t say venal without Venezuela

Perps: Yury Orekhov and seven other Russians

Charges: Conspiracy to defraud United Sates, money laundering, oil smuggling, bank fraud, violations of ECRA.

How they did it: See the 59-page indictment for elaborate lesssons on how not to smuggle Venezualen crude oil in violation of sanctions and how not to steal confidential U S military technology.

Punishment: Pending.

There oughta be a law …

While the world needs energy, your Administration commits govenmental malpractice. For examples see your daily newspaper not on one coast or the other.

Your musical interlude

These notables deserve another

Co-author Tiereney Bowman*

Texas courts continue to address the “fixed or floating” non-participating royalty interest question. The El Paso Court of Appeals’ answer in Bridges v. Uhl et al. was floating, based on the language in that particular reservation,

In 1940 the Klattenhoffs sold a 640-acre tract in Upton County to Virgil Powell, reserving, “an undivided one-half (1/2) of the usual one-eighth (1/8) royalty in, to and under the above-described land….” Over the following decades, Uhl collectively came to own 100% of the mineral estate after a series of conveyances. In 2007, Powell’s successors executed an oil and gas lease with Hanley Petroleum. Separately, in 2010, other of Powell’s successors executed a lease with Concho Operating. Both leases provided for a ¼ royalty.

The Klattenhoffs conveyed the reserved NPRI to their daughter, Ms. Bridges, granting an undivided “1/2 of the usual 1/8 royalty interests.” After Bridges learned of production from the land Concho acknowledged her right to royalties, which it calculated as a 1/16 “fixed” NPRI rather than ½ of ¼ of production. Bridges sued alleging several causes of action. The trial court entered a judgment granting Uhl’s motions for summary judgment and denying Bridges’.

On appeal Bridges argued that the trial court erred in interpreting the deed to reserve a fixed 1/16 NPRI, not a ½ floating. She also argued that granting Uhl’s motions was not supported by their affirmative defenses.

The 1940 Deed

In concluding that the deed reserved a floating ½ NPRI, not a 1/16 fixed, the Court applied Texas deed construction principles rather than a purely mathematical approach. According to the Court, “courts must holistically review the language to ascertain the intent of the parties from all of the language in the deed by a fundamental rule of construction known as the ‘four corners rule.’” (The court was reluctant to invoke the estate misconception rule.) A royalty interest may be conveyed or reserved in one of two ways: ‘as a fixed fraction of total production’ (fractional royalty interest) or ‘as a fraction of the total royalty interest’ (fraction of royalty interest).

The granting language in the text and the deed’s overall structure confirmed the grantors’ intent to reserve a ½ floating royalty. Using the double fraction could demonstrate a grantor’s intent to give the grantee half of his entire royalty interest. When the deed was drafted, 1/8 was the standard royalty for oil and gas leases.

The deed had many recognized features of a floating royalty: (1) it included double fractions; (2) the fractions included multiples of 1/8; (3) repeatedly referenced the “usual 1/8 royalty”, which relates to the parties’ use of the then-standard 1/8 royalty as a proxy for the landowner’s royalty; and (4) the prospective contemplation of the royalty taking effect at a later time is reflected by the phrase, “if, as and when production is obtained.” The deed was not ambiguous, and reserved a floating ½ NPRI.

Among other unsuccessful affirmative defenses, Uhl argued quasi-estoppel and waiver, asserting that the Bridges was “on notice” about the nature of her royalty payments as a fixed 1/16, which constituted waiver. The Court disagreed. The fact that she previously accepted royalty payments was not dispositive because Uhl failed to show conclusive evidence of Bridges’ knowledge of what she was receiving and what she should have been receiving, and she changed her position. That affirmative defense could not support summary judgment for Uhl.

The Court reversed summary judgment for Uhl, rendered partial summary judgment for Bridges, declared that the deed reserved a floating ½ royalty interest, and remanded the cause for further proceedings.

Your musical interlude.

*Tiereney is in her third year at SMU Law School and an intern at Gray Reed.

Co-author Travis Nadilini

Ellison v. Three Rivers Acquisition LLC et al., on remand from the Texas Supreme Court, is the third round of a boundary dispute between mineral lessees in Irion County.  

For the history of Ms. Ellison’s odyssey from court to court to court, see our 2019 post discussing the first Court of Appeals decision, and our 2021 post discussing the Supreme Court decision. But first,

The players

Ms. Ellison: Lessee of one of the tracts at issue, plaintiff in the trespass to try title action alleging the boundary stipulation was void.

Samson: Lessee of the Suggs lease on the adjoining tract; its landman negotiated the boundary stipulation with her late husband.

Three Rivers: Acquired the Suggs lease and wells from Samson.

Concho: Acquired the Suggs lease and wells from Three Rivers.

The decision

The Supreme Court had held that the boundary stipulation at the heart of this dispute was valid and that the defendants conclusively established their ratification defense, and remanded to the Court of Appeals.  

In addressing Concho’s breach of contract counterclaim, the Court noted the Supreme Court’s holding in favor of Concho that the absence of the contemplated “more formal and recordable document” was not fatal to the ratification defense. The Supreme Court held that “in light of the boundary stipulation and the signed 2008 letter, Ellison as a matter of law ratified the boundary line in the stipulation as the boundary of Ellison’s leasehold.” The Court overruled Ellison’s issue related to the existence of a contract.

Meeting of the minds

Ellison contended that the 2008 letter was unenforceable as a contract because there was no “meeting of the minds” as to all the material terms. Specifically, terms such as consideration, effective date, grantee identification, warranty of title information, specific well location, and the “form of the Second Document were missing” Because Ellison’s denial was not verified, Ellison waived this argument.

Ellison argued that the lack of an effective date meant that the contract was void. However, the material terms of a contract are determined on a case-by-case basis. And Ellison failed to present an argument as to why an effective date would be considered an essential material term.

Ellison provided no support for her contentions that title warranties should be an essential term, and that the well’s location was material to the contract.

Standing

Ellison argued that Concho, as assignee of Samson’s lease, lacked standing to sue for breach of contract because the cause of action was never assigned to Concho.  But because Concho had acquired all of Samson’s assets related to the 2008 letter agreement, it necessarily obtained privity with the contract. As an assignee of Samson’s contract, Concho had standing.

Public Policy

Ellison asserted that the 2008 letter was illegal and thus unenforceable as against public policy, because Concho made misrepresentations in an attempt a “land grab” to “steal” her land and oil. However, “When the illegality does not appear on the face of the contract, it will not be held illegal and thus void unless the facts showing its illegality are before the court.”

The 2008 letter was not facially illegal; it merely set out boundaries and sought acceptance of the boundary line as set forth in the stipulation. Accordingly, Ellison had the burden to plead and prove the illegality, which she did not do. Ellison waived her illegality claim.

Other issues

The Court reversed Concho’s $493K damage and $850K attorney fee award because the Property Owner Rule to establish damages does not apply when specialized knowledge is required.

And there were evidentiary and jury charge issues not relevant to this discussion.

Your musical interlude

Co-author Travis Nadalini

The negotiators and scriveners of the purchase and sale agreement in Matter of PetroQuest Energy, Incorporated would have been well served to consider all the potential ramifications, however remote, flowing from the definitions in their agreement. (Potential reply: “Who woulda thunk THAT would happen?”)

The Fifth Circuit, applying Louisiana law, held that in a federal offshore Gulf of Mexico lease trade, if a purchaser assumes liabilities for “Assets” under a purchase and sale agreement that does not require the Assets to actually transfer between the parties, then a lack of consent from the Bureau of Ocean Energy Management (or other agencies) does not invalidate the purchaser’s assumption of the liabilities. The case turned on the specific language of the agreement.

Sanare Energy Partners purchased a mineral lease and related contracts from PetroQuest and assumed liabilities for the “Assets”. PetroQuest filed for bankruptcy. Sanare, trying to avoid responsibility for the Assets, filed an adversary proceeding in the bankruptcy on the theory that the wells and lease in connection with the sale were not “Assets” for which all obligations and liabilities were assumed by Sanare.

Sanare: The interests are not “Assets”

Sanare argued that PetroQuest failed to obtain third-party consent from the BOEM, whose consent is required for mineral lease transfers on federal lands.

Sanara also argued that “absurd results” would follow if the PSA’s definition assigned liabilities to Sanara for Assets that still belonged to PetroQuest.

The Court: Yes they are

The Fifth Circuit denied the first argument, concluding that the definition of “Assets” unambiguously included the wells and lease, and the definition was not changed by the BOEM’s failure to consent. Furthermore, the court found that the consent requirement did not extend to “customary post-closing consents,” such as BOEM’s. Even so, the “Bureau’s withheld consent may prevent a post-closing transfer from occurring, but it does not change the PSA’s definitions.”

The Court also denied the absurd result argument, noting that “these absurdities do not arise from the purchase agreement’s internal definition of Asset.” Rather, they arise only if the purchase agreement requires title to an Asset to actually transfer between the parties even without the necessary consents. There was no such requirement.

Conclusion

Words have meaning! The properties were “Assets” under the PSA, even if the Bureau’s failure to grant consent prevented record title for the Properties from transferring to Sanare.

Your musical interlude

Lagniappe

More on how the climatistas resort to personal destruction of serious, mainstream scientists who dare fail to conform to the orthodoxy. In this case its Steven Koonin, former Obama undersecretary of energy and author of Unsettled: What Climate Science Tells Us, What it Doesn’t, and Why it Matters”. The Powerline post is worth a read.