Co-author Lydia Webb

Ever since the Sabine Oil and Gas Corp. bankruptcy (the top of the first, If it were baseball), where a New York court construed Texas property law to hold that a gathering agreement was not a covenant running with the land, we at Gray Reed, and you if you’re following, have speculated whether a Texas court faced with the question would have come to a different conclusion (see here and here). In Alta Mesa Holdings v. Kingfisher Midstream, a Texas court finally had its say (albeit applying Oklahoma law). For midstream entities, the court did not disappoint.

As we approach the middle innings (47 states to go!), the Alta Mesa court went against Sabine, holding that the dedication in question was a real property interest that could not be rejected in bankruptcy. Along with Badlands Energy, midstream companies have gone from being shut out to being up 2-1 on producers.

Distinguishing Sabine

E&P debtor Alta Mesa contracted with its affiliate, Kingfisher Midstream, to build a gathering system and to transport Alta Mesa’s gas. Once in bankruptcy, Alta Mesa sued Kingfisher for a declaration that the gathering agreement did not constitute a covenant running with the land and thus, could be rejected.

Because the dedicated acreage was in Oklahoma, Oklahoma law governed, although noting that real covenant law in Oklahoma is functionally the same as in Texas. The same two elements at issue in Sabine were at issue: “touch and concern” and “horizontal privity”. But the court was quick to recognize that Sabine was limited to its unique facts and should not be generalized.

The Alta Mesa gathering agreement dedicated all producer’s interest in, among other things, its oil and gas leases within the dedication area. The court held that the dedication satisfied touch and concern because both its benefits and burdens impacted the value of the real property leases. In contrast, in Sabine, the dedication only related to gas “produced and saved,” which the court construed as only affecting personal property interests.

The Alta Mesa court also found that Alta Mesa’s conveyance of a surface easement to Kingfisher satisfied horizontal privity between the parties. The court distinguished Sabine, which held that a related surface easement did not satisfy horizontal privity. Looking again to the dedication of leases, the court noted that the easements at issue were implied in Alta Mesa’s leases. By dedicating the leases to Kingfisher, it was simultaneously conveying the associated easements as well.

And the moral of the story …

It’s all about the dedication language. Since Sabine, midstream companies have tried to draft gathering agreements to get around the problem of gas “produced and saved” by getting a dedication of producer’s interest in the underlying leases. In light of Alta Mesa, in which a dedication of leases satisfies both contested elements of a covenant running with the land, those efforts were not in vain.

As gathering agreements go, so goes our musical interlude.

 

Co-authors Paul Yale and Rusty Tucker

The concurrence and dissent in Briggs et al v. Southwestern Energy Production Company appears to be of little help to property owners complaining of trespass by fracking where there is no invasion of frack fluids on to the neighbor’s property. Justice Dougherty, joined by Justice Donohue, agreed with the majority that the rule of capture “remains effective in Pennsylvania to protect a developer from trespass liability where there has been no physical invasion of another’s property.” And they believed the majority correctly recognized that “if there is such a physical invasion the rule of capture will not insulate a developer engaged in hydraulic fracturing from trespass liability.”

The dissenters spent most of their time on issues of pleading and procedure, arguing that it was erroneous to suggest that Briggs didn’t allege a physical invasion. They would have affirmed the Superior Court’s disposition insofar as it vacated summary judgment and remanded it for further factual development, in particular completion of discovery on the factual question of physical invasion. Continue Reading Pennsylvania Says No Trespass by Fracking – the Dissent

Co-authors Paul Yale and Rusty Tucker

Herein, highlights from the Pennsylvania Supreme Court in Briggs, et al. v. Southwestern Energy Production Company. The rule of capture applies to oil and gas produced from wells completed using hydraulic fracturing and precludes trespass liability for drainage from under nearby property, where the well is drilled solely on and beneath the driller’s own property and frack fluids are injected solely beneath the driller’s own property.

Why is this a big deal?

This decision is only the second application by a state supreme court of the rule of capture to hydraulic fracturing (from Texas, Coastal Oil & Gas Corp. v. Garza Energy Trust was the first). The Pennsylvania Supreme Court has reached a similar result – drainage resulting from hydraulic fracturing does not itself constitute trespass. Continue Reading Pennsylvania Supreme Court Says No Trespass by Fracking

Co-author Ethan Wood

Yet another entry in the Strip and Gore universe (2012’s “Beware of Strips and Gores”, and 2019’s “Strip and Gore 2: The Sequel”) comes to us from Fort Worth Court of Appeals: Richard D. Crawford v. XTO Energy, Inc.

Those of you following along with each chapter of the saga know the drill by now (pun is intended): The strip-and-gore doctrine acts to pass title to lands in addition to lands described in a conveyance when: (1) the “strip” is relatively narrow, small in size and value in comparison to the expressly conveyed land, and no longer important or valuable to the grantor of the larger tract; (2) the “strip” was not included in the property description at issue; and (3) no other language in the deed indicates the grantor intended to reserve an interest in the “strip.” In this case—like those before it—the minerals underlying the 8.235-acre tract passed with a conveyance of the 76 acres to the north and south because said minerals were inaccessible and therefore valueless at the time of conveyance.

The reservation

In 1964, Mary Ruth Crawford conveyed the 8.2355 acre tract to Texas Electric Service Company with the following reservation:

“Grantors reserve unto themselves, [and] their heirs and assigns, the right to all oil and gas in and under the lands herein conveyed but expressly waive all rights of ingress and egress for the purpose of drilling for or producing oil and/or gas from the surface…; provided that wells opened on other lands may be bottomed on the [8.2355 acre tract]”

 

In 1984, Mary conveyed 76 acres to the north and south of the 8.2355 acre tract without reserving any oil and gas interests or mentioning her previously reserved right to the oil and gas under the 8.2355 acre tract. XTO and its predecessors obtained leases from Mary and the owners of the adjacent 76 acres and pooled all of the leases into the Eden Southwest Unit. XTO’s title opinion credited the adjacent landowners and not Mary’s successor-in-interest, Richard. Richard sued to recover royalties.

The question for the Court … and the answer

The primary question was whether the 8.2355 acre tract had “ceased to be of any benefit or importance” to Mary. The court held that although Mary had reserved right to bottom wells on the 8.2355 acre tract in 1964, she effectively stranded her “strip” when she conveyed the 76 acres to the north and the south of it in 1984.

Musical Interlude

Strip-and-gore cases in from the Barnett Shale era may in fact be inevitable, but to that we say, “I am Iron Man.”

To our bad guys, 2019 was a year flush with hope and opportunity; it ended with recidivism, more misery from Venezuela, a charlatan, an Okie who pulled a multi-million dollar fast-one on Chesapeake and, as in years past, a peek into the darker side of the human condition.

_____________________

Perp: Justin Lane Foust.

Crime: Wire fraud, aggravated identity theft and money laundering.

How he did it: Defrauded Chesapeake Energy. Employed by a subsidiary of Chesapeake until 2011. He formed Platinum Express and became an approved vendor. From 2011 until 2014 Chesapeake contracted with Platinum to transport wastewater to disposal facilities in western Oklahoma.

Generated fraudulent invoices, each for less than $5,000, which he knew from his prior work at Chesapeake required a lower level of approval for processing and payment. He forged the signature and employee ID number of a Chesapeake employee.

Once cornered, he panicked: He obstructed justice by using civil lawsuits as a diversionary tactic to implicate others in his wrongdoing, destroyed evidence, staged a fake break-in of his office, and provided false information to law enforcement.

Sentence: 121 months in prison, restitution of $2.6 million and forfeiture of $4.345 million.

_____________________

Perp: Robert J. Magniafico, Jr.

Crime: Would have been Reg D violations. The Texas State Securities Board got him before he could actually steal.

Checkered past: Convicted of six felony violations in separate transactions. Served four years of a 40-year prison sentence for stealing $655,000 from elderly widows in the Dallas area by selling fake annuities.

How he almost did it: Sought investors to buy stakes in Oklahoma oil and gas wells, promising returns of 25 to 52 percent. The securities were not registered in Texas. He formed Premier Resources LLC right after being paroled from prison in December 2017.

Sentence: Emergency cease and desist order.

_____________________

Perp: Christopher Daniel Walsh.

Crime: Fraud, money laundering and felony theft of $492,000 from victims who thought they were oil investors but were really investing in Mr. Walsh’s lifestyle.

How he did it: Used Western Capital Inc. to steal from 12 Investors in oil wells to be drilled in the High Island section of eastern Galveston County, Texas. He used turnkey projects, a financing arrangement in which investors pay a set amount to the promoter, who assumes financial responsibility for cost overruns. These usually involve an astronomical turnkey price that is virtually guaranteed to net the promoter lots of money and the investors none. The promoter wins even if the well is a duster.

Sentence: 18 years in state prison after reaching a plea agreement in his fraud trial in Wichita County, Texas.

______________________

 Perp: Paul Gilman.

Crime: Securities fraud under the federal Exchange Act and Securities Act. He misappropriated stole investor funds.

Checkered past: In a previous incarnation, claiming to be a music visionary he launched a series of unsuccessful businesses that used soundwave technology to optimize sound systems in sports stadiums.

How he did it: When those businesses failed, with absolutely no experience in the oil business, he was going to use his purported soundwave technology to lower the viscosity of oil in enhanced water separation and purification processes. Claimed that viscosity is the “holy grail” of the oil industry and he “captured it”. There was no evidence that he ever spent the money on testing or developing the soundwave technology.

Raised $3.3 million from 40 investors in several states, guaranteeing that their investments would result in substantial profits. Victims included a minister from Tennessee, a psychology professor from Texas and a nurse from Dallas. He put substantially all the money into traditional fraudster uses: luxury Las Vegas hotels, restaurants, designer clothing, and home furniture.

Sentence: None yet

_____________________

Perp: Mark Johnson.

Crime: Wire fraud and conspiracy to commit wire fraud by materially false and fraudulent pretenses to the “Victim Company” (Cairn Energy, a large European E&P company) that was engaged in a multi-billion dollar Europe-to-India transaction. The prosecution featured theft of the Victim Company’s confidential information.

How he did it: A foreign exchange trader who supervised HSBC Bank’s foreign exchange business, Johnson manipulated foreign-exchange rates as the transaction was about to close by trading Sterling, Euros and Dollars, from which he generated significant profits. He did not disclose his own “P Book” trades to the Victim Company. When the company inquired, he blamed everything on the “Russians”. See this insightful Baker Botts analysis of the proceeding.

Sentence: 24 months imprisonment, three years of supervised release and a $300,000 fine.

_____________________

Perps: Rafael E. Pinto-Franceschi and Franz Herman Müller-Huber, president and sales rep of a Miami-based company.

Crime: Violation of the Foreign Corrupt Practices Act, wire fraud, conspiracy to launder money.

How they did it: Bribed three officials of Venezuela’s national oil company PDVSA and took kickbacks $985,000 and $258,000. Talk about feeding at all the troughs, three percent of each kickback payment would go to a Swiss bank account (one would think for the bribees).

As of now, 21 individuals have been charged in this far-reaching victimization of the citizens of this once-proud and prosperous country and 15 have pled guilty.

Sentence: None yet.

A musical interlude in honor of our 2019 perps.

Co-author Ethan Wood

Merry Christmas and Happy Holidays from all of us at Gray Reed! Assuming that most of you have been good this year (stay tuned for 2019’s Bad Guys in Energy to see who hasn’t), we hope Santa brought you everything on your Amazon Wish List. Our sympathies go out to those in the oilfield services industry in Texas—it looks like you got a lump of coal. In Mesa Southern CWS Acquisition v. Deep Energy Exploration Partners the Houston Court of Appeals upended the long-held view that mineral lien waivers violate public policy. Bah Humbug! Continue Reading Oil Field Services: What is the Status of Mineral Lien Waivers?

Co-author Kelley Clark Morris

Suing a state and its public officials is difficult because of the doctrine of sovereign immunity. There are exceptions. State of Texas v. Signal Drilling, et al. presents several of them.

The rules

The State and its agencies are immune from:

  • Suits seeking to construe or enforce contracts to which the State is a party,
  • Declaratory judgment actions,
  • Ordinary trespass to try title suits.

There are exceptions. For example:

  • Claims against a state official in his representative capacity for non-discretionary acts unauthorized by law (the ultra vires exception).
  • Claims for an unconstitutional taking of property without adequate compensation.
  • Suits to require state officials to comply with statutory or constitutional provisions.

Continue Reading No Sovereign Immunity for the Texas Land Commissioner

Co-author Rusty Tucker

Let’s talk the Duhig Rule and estoppel by deed in Texas. Don’t run away yet. We’ll get to the point quickly and then you can leave.

Under the doctrine of estoppel by deed:

  • “All parties to a deed are bound by the recitals therein, which operate as an estoppel, … and binding both parties and privies … ”
  • Estoppel by deed “does not bind mere strangers, or those who claim by title paramount the deed. It does not bind persons claiming by an adverse title, or persons claiming from the parties by title anterior to the date of the reciting deed.”
  • Estoppel by deed “does not bind individuals who are not a party to the reciting deed, nor does it bind those who claim title independently from the deed in question.”

Under Duhig v Peavy-Moore Lumber Co.: “If a grantor reserves an interest and breaches a general warranty at the very time of execution, then an immediate passing of title is triggered to the grantee for that property that was described in the reservation—in other words, if the grantor owns the exact interest to remedy the breach at the time of execution and equity otherwise demands it.”

So said the Supreme Court of Texas in Trial v. Dragon.

If you aren’t a title examiner or a landman, you have permission to proceed directly to the musical interlude.

The facts

Leo Trial and his six siblings each owned a 1/7th interest in property in Karnes County. In 1983 Leo gifted to his wife, Ruth, half all of his right, title and interest in the property. Thus, Ruth owned a 1/14th interest in the property as her separate property.

In 1992 Leo and his siblings purported to convey the entire property to the Dragons. Each of the seven siblings executed identical deeds with the following language: “WE, … GRANT, SELL AND CONVEY … all that certain parcel … being situated[d] in Karnes County… .” There was a 15-year mineral reservation and a general warranty clause.

Ruth was not a party to the 1992 deed, the deed did not mention her interest, and the Dragons were not otherwise aware of the 1983 deed, having obtained no title opinion. Leo died leaving his entire estate in trust for the benefit of Ruth for life, then the corpus to his two sons. Ruth died and her 1/14th interest passed to the sons.

An operator, actually paying attention to a lease status report that Ruth owned an undivided 1/14th interest, prepared a new division order and began paying the sons their respective royalties in a suspended account. The Dragons sued, claiming the property s owners.

The Dragons’ losing arguments

  • Under Duhig and its progeny, Leo breached the general warranty in the 1992 deed at the time of execution because he owned only half of what he purported to convey. The sons, as Leo’s direct heirs, are bound by the deed’s general warranty and are estopped from asserting title on any portion of the property.
  • XTO Energy, Angell, and Musick applied (see the opinion for facts and cites).
  • At the time the sons inherited the disputed interest, the after-acquired title rule was triggered and the interest vested immediately in the Dragons to make them whole under the express terms of the 1992 deed.

These arguments all failed because the facts differed significantly from those in Duhig. Leo did not own the interest required to remedy the breach at the time of the deed to the Dragons. Rather, Ruth owned the interest as her separate property. The Trial sons claimed through their mother, not their father.

Breach of warranty = damages

The Trial sons couldn’t avoid liability entirely. There was no question that Leo breached the general warranty at the time of execution. Therefore the proper remedy was monetary damages. Because the Trial sons are the direct heirs of Leo, they were bound by the general warranty to forever defend the Dragons from adverse claims to the property. The only question was whether the Trial sons are liable for damages when they failed defend against their own adverse claim to the property, and if so, what would the damages be.

The result

Because the Trial sons’ claim to the property was derived from their mother, an independent source predating the 1992 deed, estoppel by deed and Duhig did not divest the sons of their interest. The court remanded the case to the trial court to determine whether damages were appropriate.

The musical interlude

Contemporary music from New Orleans isn’t always what you’d call “New Orleans Music”. Witness John Fohl.  But then you have Renard Poche.

 

Co-author Rusty Tucker

In Texan Land & Cattle II, Ltd. v. ExxonMobil Pipeline Company a Texas court of appeals ruled that “oil or gas” is not limited to “crude petroleum,” but includes refined petroleum products gasoline and diesel.

The easement

Texas Land’s property in Harris County is burdened by an easement obtained by ExxonMobil from Humble Oil Company in 1919 that granted the right to lay, maintain, operate, and remove a pipeline for the “transportation of oil or gas” across Texas Land’s property. The easement does not define oil or gas.

The arguments

The sole issue was the definition of oil and gas as used in the easement. Texas Land contended that “oil and gas” granted the right to transport only “crude oil” or “crude petroleum,” but not refined products. ExxonMobil argued that “oil and gas,” as used in the early 20th century, included refined products such as gasoline and diesel. Continue Reading What is “Oil or Gas” as Used in a Pipeline Easement?