At issue in RKI Exploration and Production LLC v. AmeriFlow Energy Services LLC and Crescent Services, LLC. were two Master Service Agreements.  RKI was the operator of a well in Loving County; AmeriFlow and Crescent were contractors. A sand separator exploded at the well site injuring or killing three workers who worked for another subcontractor. The result was three suits in New Mexico and a mazelike series of indemnity demands, denials, settlements, and judgments, including settlement of one death case for $9.1 million.

To preserve your patience, and mine, let’s focus on the takeaways from this 72-page behemoth of an opinion based on a 10,000-page record.

Grammar lessons

The court defined a phrase common to Master Service Agreements: “arising in connection herewith”. Indemnitees AmeriFlow and Crescent argued that the phrase “encompasses all activities reasonably incident to or anticipated by the principal activity of the MSA, which was oil well operation”. No, it doesn’t. The court determined that the phrase requires a causal connection between the MSA and the claims for which the indemnitee sought indemnity. The scope of work envisioned in the MSA was defined by work orders, and the indemnity could go no further than the scope of work. Continue Reading Texas Court Addresses MSA Indemnity Obligations

Co-author Trevor Lawhorn

SM Energy Co. v. Union Pac. R.R. Co. considers a question frequently asked in Texas suits affecting title: When is a suit a trespass to try title action and not a declaratory judgment action?

The dispute

SM Energy and Union Pacific are parties to three oil and gas leases covering lands in Howard County. Each lease contains the same forum-selection clause providing for exclusive venue in “… Omaha, Nebraska and no other place.”

Union Pacific demanded that SM pay damages for breaching the leases. SM failed to pay in time but later tendered the damages and identified other leases in violation of a most-favored-nations clause. Union Pacific eventually accepted tender of SM’s offer, but maintained that SM owed $5mm+ in liquidated damages.

SM sued Union Pacific in Howard County asserting SM’s ownership of the leasehold estate and claiming that Union Pacific unlawfully dispossessed SM of its right to possession. Union Pacific responded with a motion to dismiss for improper venue, arguing that Omaha was the proper forum, citing the forum-selection clause and Texas’ “major transactions” venue rule (Civil Practice and Remedies Code §15.020).

The trial court granted Union Pacific’s motion. SM appealed and argued that the trial court erred in enforcing the forum-selection clause and erred by finding that Nebraska was a proper forum to litigate the dispute.

The appeal

The Court of Appeals affirmed.

SM asserted that its trespass-to-try-title action could only be litigated in Texas; therefore a Texas court has exclusive subject-matter jurisdiction.  The Court considered the substance of SM’s petition and saw a claim for declaratory judgment to determine SM’s obligations, not trespass-to-try-title. SM pleaded certain elements of trespass-to-try-title but its claims of dispossession were, in substance, dependent on an initial determination that the liquidated damages provision was unenforceable.

Second, the Court disagreed that SM’s claim was a suit to remove a cloud on title. SM could not show that Union Pacific’s claim was invalid or unenforceable, which is a prerequisite to a suit to remove a cloud on title.

Third, the Court disagreed with SM’s contention that enforcement of the forum selection clause would violate Texas’s public policy against piecemeal litigation. For all intents and purposes, the claimant was Union Pacific because Union Pacific is the party asserting that SM breached the leases.

The trial court also erred by finding that Nebraska was a proper forum to litigate the dispute—The 640-acre lease met the requirements of a “major transaction” as described by the venue rule. This question turned on whether the lease evidenced consideration exceeding $1mm for purposes of the statute. The lease failed to state consideration exceeding $1mm, but related documents could be considered as evidence of a major transaction. One week after execution of the lease, Union Pacific confirmed to SM’s predecessor-in-interest that the original lessee paid Union Pacific a lease bonus of $2.4mm. The court considered confirmation to be a separate instrument that was executed at the same time, for the same purpose, and in the course of the same transaction such that the documents could be analyzed together.

Takeaways

  • Courts will look to the substance, not the form, of a party’s pleadings to determine whether a claim is for trespass-to-try title or declaratory judgment.
  • When the issue of dispossession of title is secondary to the determination of the breach or enforceability of a contract, courts may find the case to be for declaratory judgment, not trespass-to-try-title action.
  • The lease and separate documents reflecting payments that relate to the lease may be construed together for purposes of establishing the value of the lease.

RIP Sonny Corleone and Paulie Walnuts.

Co-author Trevor Lawhorn

Non-operators under the 1989 Model Form JOA have been hoping to drive a stake through the dark heart of Reeder v. Wood County Energy, LLC. Bachtell Enterprises, LLC v. Ankor E&P Holdings Corp might be a start. The question was whether the Article V.A. exculpatory clause exonerated the operator who intentionally passed expenses to non-operators without their consent.

The clause did not allow the operator to engage in such activities. The term “activities” is not so broad as to protect an operator such that it can have no liability for breach of any contract, absent willfulness.

Facts

Ankor the operator negotiated with CDM to construct a gas plant and told the non-operators that third-party ownership of the plant would, among other things, “eliminate[ ] the need for the [nonoperators] to provide capital for construction.”

The non-operators approved AFE’s for expenses totaling $385,000. Additional AFE’s would cover certain other expenses. The JOA required non-operator consent for “ .. any single project reasonably estimated to require an expenditure in excess of $50,000.”

Article V.A. required Ankor to [c]onduct its activities …  as a reasonably prudent Operator, … It shall have no liability as Operator … for losses sustained or liabilities incurred, except such as may result from willful misconduct.

A year after the CDM agreement, Ankor told the non-operators that until the plant was paid off CDM would “retain[ ] all plant revenue as credit towards the full operating costs, transfer and fractionation fees, and amortized capital. Any balance due [CDM] is born by the Ownership. The balance … due [CDM] is approximately $1,590,000.” Ankor then sent a JIB totaling $1.6MM. The non-operators refused to pay.

Trial court

Ankor sued the non-operators claiming breach of the JOA for failure to pay the JIBs. Non-operators responded that Ankor breached first by:

  • charging for gas plant construction without consent,
  • withholding revenue without consent or authority,
  • committing non-operators’ gas to CDM without authority,
  • agreeing not to disclose the CDM service agreement, and
  • charging unauthorized attorney’s fees.

The jury found that both Ankor and the non-operators breached the JOAs but Ankor breached first (and its breach was the result of willful misconduct). Both sides were awarded damages by the jury. The trial court awarded damages and attorneys’ fees to Ankor and a take-nothing judgment against the nonoperators.

The appeal

The exculpatory clause did not absolve Ankor of liability for failing to obtain consent for charges over $50,000. Other clauses were a factor in the holding, for example:

  • imposing individual liability for performance of each party’s obligations, and
  • prohibiting Ankor from withholding oil revenues to reimburse costs in the absence of a non-operator delinquency.

In response to Ankor’s argument that “activities” should be construed broadly to include even intentional breaches of contract that do not rise to the level of willful misconduct, non-operators countered that “Ankor’s interpretation of the exculpatory provision turns [it] into a provision that allows the operator to impose liability on the Non-Operators when it is intended only to be a shield to the Operator’s liability.”

The clause was substantially similar to the one in Reeder in which the SCOTX held that the term “activities” broadened the scope of the clause to include actions under the JOA beyond operations. (The 1982 form protects the operator’s “operations”; the 1989 protects “activities”.) InReeder the operator was shielded from liability for

The appellate court refused to extend Reeder to excuse Ankor’s willful misconduct. Ankor could not use the exculpatory clause offensively to impose liabilities on non-operators that Ankor knowingly incurred without consent. The non-operators were excused from their payment obligations. Judgment for Ankor was reversed.

Your musical interlude, as you ease back to work.

Co-author Carolina Cuppitelli*

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

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

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

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

The conveyances were sales for consideration

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

Money Had and Received

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

Takeaways

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

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

Your musical interlude.

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

Author Ethan Wood

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

Background

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

The Condemnation Proceedings

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

Governmental Immunity Arguments

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

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

Additional Arguments

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

This week’s musical interlude

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

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

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

Your musical interlude.

 

 

 

Co-author Brittany Blakey

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

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

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

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

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

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

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

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

Co-author Brittany Blakey

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

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

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

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

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

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

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

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

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

The energy companies removed because the claims:

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

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

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

Your musical interlude

Co-author Brittany Blakey

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

The lease provisions

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

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

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

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

A refresher on “market value at the well”

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

Gas royalty

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

Free use

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

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

Co-author Jamie Mills*

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

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