Co-author Rees LeMay*

In Apollo Exploration, LLC v. Apache Corp., Texas’ 11th Court of Appeals analyzed several provisions of purchase and sale agreements in a complex oil and gas transaction and demonstrated a measured, text-centered approach to the interpretation of contract language.

Significant parts of the holding hinged on the Court’s reference to defined terms in the contracts, highlighting the importance that contracting parties clearly clarify contract terminology. The lesson for the scrivener is to know and understand two things: The effect of each word in the document, and the “big picture”: What, ultimately, are the parties trying to accomplish? This is as necessary as it is difficult, especially when the document is long and the transaction is complex.

The case is of particular interest in the context of PSAs, which address, and therefore must define, back-ins, “payout”, “leases” and a host of other terms. Apollo and its co-appellants had collectively owned 98% of the working interest in 109 oil and gas leases, covering significant tracts in the Panhandle. Apache purchased 75% of the interests, entering into four separate (but largely identical) PSAs.

The meaning of “all” and “affected leases”

Apache was to provide the sellers with an annual review and commitment for development of the leases in each the coming year. If the contents of the reports would result in the loss or release of any of the leases, Apache would then have to “offer all of [its] interest in the affected Leases” to the seller, and to transfer them to the seller upon the seller’s acceptance.  The fight centered on construction of the simple word “all,” as well as the term “affected leases.” As to the latter, Apollo argued that, to the extent that some leases covered fractional mineral interests in overlapping acreages, the term “affected leases” required Apache to offer all leases covering a given acreage, even if only one would be lost. Apache countered that it need only offer the specific leases that were set to be lost. The court, focusing largely on the definition of “Leases” in the PSAs themselves, agreed with Apache.

As to the construction of “all,” though, the Court, relying on the dictionary definition of the word, concluded that the term expressly required Apache to offer all of its interests in an affected lease to each of the sellers. Apache argued that this interpretation would render compliance functionally impossible. The court disagreed, noting that the interests could potentially be transferred to the sellers collectively, or that only one seller might accept. The court saw this result as an “unavoidable” consequence of the PSAs’ express language. Apache was bound by the documents as they were written.

You will live or die by your defined terms

The second disputed provision preserved to each seller a back-in option for up to one-third of its conveyed interest once the project reached 200% of “Project Payout.” Again, the court gave great weight to the PSA’s defined term.  The PSA definition of “Project Payout” provided a definite formula for the calculation. The court rejected Apache’s argument that it needed to achieve a 2:1 return on its overall investment for the back-in option to trigger, instead holding the parties to the expressly defined terms they had agreed on.

Of special interest to trial lawyers are pages 38 to 58, in which the court resolving disputes over the trial court’s striking of several of Apollo’s expert witnesses for reliability and untimely designation of adjusted opinions.

*Rees is a rising 3L at Duke Law school and was a Gray Reed summer associate.

Your musical interlude … Edwin Edwards, RIP

Co-author Rusty Tucker

Howard, et al. v. Matterhorn Energy, LLC, et al. [6th Dist.] May 4, 2021 considered the Texas Citizens Participation Act as amended, effective on September 1, 2019.

Background

The lessors leased their minerals in 1,100+ acres in Harrison County to Matterhorn. To induce the deal, Matterhorn several representations to the lessors and agreed to a continuous development program. The lease required lessors to give 60 days’ notice of a breach before filing suit. Before the primary term expired gas prices dropped and Matterhorn decided to sell the lease.

The lessors sued Matterhorn for damages and rescission based on several causes of action  and filed a notice of lis pendens. Matterhorn alleged it had contracted with EnergyNet to market its interest in the lease and that when lessors became aware they filed suit and a notice of lis pendens.

Testimony showed that the lessors made false misrepresentations about Matterhorn and Cherry to third parties (including prospective purchasers) prior to filing suit. Matterhorn claimed these discussions led to the termination of its sales agreement with EnergyNet. Matterhorn counterclaimed for tortious interference and business disparagement.

Lessors moved to dismiss Matterhorn’s claims under the TCPA because they were based on their petition and lis pendens and invoked their exercise of the right to petition the courts for relief. Lessors further argued they established an affirmative defense entitling them to judgment as matter of law because the counterclaims were barred by the judicial proceedings privilege.

Matterhorn responded that the communications forming the basis of their claims were among private parties, not the public, and occurred prior to the filing of the litigation. There was testimony about how lessors’ third party discussion and filing of the lawsuit and lis pendens caused Matterhorn to lose its ability to sell the lease. Plaintiff Howard admitted in a deposition that he filed the lawsuit before expiration of the primary term and before penalties under the lease were due to “put . . . a drain on” Matterhorn and affect its ability to “flip” the lease. The trial court denied lessors’ TCPA motion to dismiss.

The TCPA process

Resolving a TCPA claim occurs in three steps: Continue Reading Texas Court Applies Amended Citizens Participation Act to a Lease Dispute

Co-author Rusty Tucker

Ridgefield Permian, LLC, et al. v. Diamondback E & P LLC, et al. addresses the scope of a property interest foreclosed upon by a tax suit in Reeves County, Texas. In this post we will shortcut the complicated facts and discuss the takeaways. The rules are what you need.

Royalty interests that were subject to an oil and gas lease were foreclosed upon and sold by the sheriff. The lease then terminated. Both the purchaser of the foreclosed interest (Magnolia, LLC) and the assignee (the Trust) of the former royalty owner whose interest was foreclosed upon (Albert) claimed to own the possibility of reverter * (the POR) and granted oil and gas leases.

The point

The Supreme Court of Texas has held that a POR is not taxable. The POR was not included in the property interest that was the subject of the tax foreclosure. The foreclosed interest was a royalty interest under the Meriwether lease. The POR, owned by Albert, was not derived from, part of, or attached to the foreclosed royalty interest. Therefore, the tax lien did not attach to the POR. Continue Reading Tax Foreclosure on Royalty Did Not Include Possibility of Reverter

Co-author Rees LeMay*

“Ratification is not a game of ‘gotcha’”, said the Texas Supreme Court in BPX Operating Co. v. Strickhausen.  The Court, in a 5-4 opinion, addressed the standard for an oil and gas lessor’s implied ratification of an unauthorized pooling. Among other lessons, this decision warns royalty owners to be careful when cashing those royalty checks. Continue Reading Supreme Court Introduces Totality of the Circumstances Test for Implied Ratification

Co-author Brittany Blakey

In Headington Royalty, Inc. v. Finley Resources, Inc., this release was included in an acreage swap agreement:

Headington waives, releases, acquits and discharges Petro Canyon and its affiliates and their respective… predecessors and representatives for any liabilities… related in any way to the Loving County Tract…”

The swap agreement did not explicitly mention Finley Resources, and Finley did not execute the agreement.

The question

Was “predecessors” limited to prior corporate forms of the released party and its affiliates, or did it include predecessors-in-title?  The court held that Finley was not a corporate predecessor of Petro Canyon or its affiliates and therefore was not a released party.

The circumstances Continue Reading “Predecessors” Does Not Include Predecessors-in-Title, Says Court

Co-author Rusty Tucker

What if you pay good money for a mineral interest and record the deed in the official public records, thereby securing your title? What if your predecessors-in-title decide among themselves they made a material mistake in a conveyance way back in the chain of title, fix the alleged error, and record the correction deed? What if they don’t seek your approval and don’t even bother to tell you about the fix? What if that is deemed to be an acceptable way of correcting real property instruments? Here’s what: Chaos, loss of your property rights, not to mention bidding adios to the stability of record titles in Texas.

In Broadway Nat’l Bank Trustee v. Yates Energy Corp. the Supreme Court of Texas held that Section 5.029 of the Texas Property Code does not require that correction instruments be executed by a party’s heirs, successors, or assigns if all of the original parties to the recorded instrument executed the correction, even if an original grantee of the instrument has since conveyed the interest that the correction deed is correcting.

The dispute

  • 2005: Broadway Bank, Trustee, conveys mineral interests in DeWitt and Gonzales Counties to John in fee simple.
  • 2006: the Bank executes a correction mineral deed attempting to change the fee mineral interest to a life estate.
  • John does not sign this instrument.
  • 2012: John executes royalty deeds conveying his interests to Yates Energy.
  • 2013: Broadway Bank, John, and the original grantees of the 2005 deed execute a second correction deed, again attempting to change the fee interest to a life estate.
  • This correction deed is not executed by Yates or its assigns.
  • John dies. A dispute arises:  Did the royalty interests conveyed to Yates vest in the remaindermen in the 2013 correction deed or did Yates and its successors obtain a fee interest.
  • The probate court declares the 2013 correction deed valid. It conveyed a life estate to John.
  • Yates appeals, contending that the 2013 correction deed did not comply with the Material Correction Statute (Section 5.029).
  • The Court of Appeals holds that Section 5.029 requires that correction instruments be executed by a party’s heirs, successors, or assigns, rather than only the original parties, if the property interest has been conveyed by an original party.
  • The Supreme Court reverses.

The statutes

In 2011, the Texas Legislature enacted the Correction Instrument Statute (Property Code §§5.027-5.030) to enlarge the instances in which a correction instrument could be executed. Correction instruments that comply with either the Non-Material Correction Statute (§5.028) or the Material Correction Statute relate back to the date of the recorded original and effectively “replace” the original instrument.

Material corrections

It was undisputed that changing the interests conveyed in the 2005 Mineral Deed was a material correction and that the 2006 Correction Deed failed because John did not execute it. Were Yates and its assigns necessary parties to the 2013 Correction Deed?

Section 5.029(b) says a correction instrument must be executed by each party to the recorded original instrument the correction instrument is executed to correct or, if applicable, a party’s heirs, successors or assigns.

The Court reasoned that “or” is typically understood as a disjunctive term, meaning that either of the separated words or phrases may be employed without the other. In ascertaining the meaning of “if applicable,” the Court reasoned that the statutory text does not support a preference either way for the joinder of heirs, successors and assigns merely because they exist.

The statute’s plain language and the Property Code’s scheme confirm that section 5.029(1) is satisfied when all parties to the original transaction agree to correct a material mistake in the original conveyance.  Accordingly, because the 2013 correction deed was executed by all of the original parties, the court of appeals erred in declaring the correction instrument invalid.

Limitations

Broadway Bank’s lawsuit was not barred by limitations. The Property Code does not require that parties making a material correction do so within four years of the mistake.

Innocent Purchasers?

The Supreme Court remanded to the court of appeals to consider the trial court’s ruling that neither Yates nor its assigns are bona fide purchasers.

Was there a dissent?

You betcha! According to the four dissenters, the majority read the words “if applicable” out of the statute by allowing the original parties to alter a deed without even giving notice to the current owners. Aside from a grammar lesson and what is possibly the longest footnote in judicial history, their most compelling argument addresses the consequences of the decision. For instance, requiring current property owners to monitor real property records for correction instruments filed by their predecessors is especially burdensome.

TXOGA agrees. Their amicus brief warned of the perils of reversing the court of appeals.

Tired of codgers’ YouTube laments that today’s “young people” listen to garbage? The codgers, apparently impaired by that bummer acid trip in Daytona back in ‘69, aren’t paying attention.

How about Jackie Vensen

… or Rhiannon Giddens?

In the fifth and final installment on the climate change debate, Gray Reed energy partner Paul Yale considers (and responds to) another criticism of Bjorn Lomborg’s False Alarm: How Climate Panic Costs Us Billions, Hurts the Poor, and Fails to Fix the Planet.

Joseph Stiglitz in the New York Times negatively reviewed False Alarm … .  Stiglitz, well-qualified as a professor of economics at Columbia University and a Nobel Prize laureate, accuses Lomborg of being simple and simplistic and implies that Lomborg admits there’s not much we can do about climate change. This is not an accurate portrayal of the book. Lomborg discusses many things that can be done to address climate change: carbon taxes, nuclear fusion, fission, carbon capture, water splitting, refining oil from algae grown on ocean surfaces, and geoscience engineering techniques. Lomborg recalls Paul Ehrlich’s 1960’s book The Population Bomb, which predicted mass starvation in the 1980s. Except it didn’t happen because of technological innovation.

Stiglitz accuses Lomborg of being biased but it looks like everybody is biased. In asking whether the benefits of some proposals to combat climate change are worth the cost, Lomborg refers to reducing the speed limit to 3 mph as a way to eliminate car crashes that kill 400,000 people per year. At what point is the benefit worth the cost? And spending trillions to combat climate change will take funds away from solving other problems.

In the end, Lomborg is an optimist who believes that global warming is real but manageable and that there are ways to beat climate change without having to sacrifice global economic growth.

Another musical interlude for our upcoming holiday.

CORRECTED
Co-author Ashley Atwood*

Apache Corporation v. Castex Offshore Inc. et al, answers the question, What constitutes willful misconduct in oil field operations? This was a breach of contract suit involving operator Apache and non-operator Castex.

In the exculpatory clause of the model form JOA, the operator can be liable only in the event of gross negligence or willful misconduct. In considering willful misconduct, under both the Texas and Louisiana definitions of “willfulness”, intent to cause harm is not required.

The question is whether the evidence establishes that a defendant-operator intentionally or deliberately engaged in improper behavior or mismanagement, without regard for the consequences of his acts or omissions.

Severe overspending, breaching company policy, and failing to timely notify the other party DO (THIS IS THE CORRECTION) meet the standard.  The existence of better decisions and routes to take do not create an inference of willful misconduct. A company selling its own assets only offers a scintilla of evidence that the company doesn’t care about the consequences of its actions.  The opinion has plenty of detail about the facts behind the decision.

The facts

Apache was operator under several agreements: (1) the “Belle Isle Agreement”, to expand a natural gas facility; (2) the “Potomac Agreement”, for the drilling of a well; and (3) the “Apache Contracts” (which we will not discuss).

Apache sued Castex for failure to pay its proportionate share of costs. Castex countersued alleging that Apache’s mismanagement caused gross overspending at Belle Isle and irreversible damage to the reservoir at Potomac. The jury found in favor of Castex and awarded $62 million. The appeals court reduced the judgment to $13.5 million.

Belle Isle Agreement

This was not a JOA but the parties used the willful misconduct standard. Apache’s outside engineering firm hired and fired numerous project managers who were underqualified and inexperienced. There was objective proof that one such manager was aware of the cost overruns for months but failed to act, having the attitude money was no object throughout the process, and knowingly misrepresented the amount he planned on spending.

For example, an AFE for $16.9 million was followed by a supplemental AFE for $37.7 million, and a second supplemental AFE for $78.5 million. Total AFE’s were $102 million by the time the project was completed.

Apache claimed that the cost overruns were ordinary negligence at most (with a whiff of stupidity) and asserted the legal maxim that “no sane company would purposefully increase its own costs”. The jury found Apache failed to comply with the Belle Isle Facility Agreement as a result of willful misconduct, awarding $5.5 million in damages.

Relying on Mo- Vac Serv. Co. v. Escobedo, (from the Texas Supreme Court) the appeals court turned to the ordinary meaning of willful misconduct since there is no technical legal definition. Relying on the Oxford dictionary definitions of “willful” and “misconduct,” the court set this standard: “A plaintiff can show that a defendant is liable for willful misconduct if the evidence establishes that the defendant intentionally or deliberately engaged in improper behavior or mismanagement, without regard for the consequences of his acts or omissions.”

Potomac Agreement

This dispute was over Apache’s alleged mismanagement in failing to set liners which would have protected gas reserves from the influx of water that crippled the profitability of the project. Castex sought damages for its share of drilling cost overruns and watered-out gas reserves.

Here, the appellate court found that evidence of willful misconduct was not legally sufficient to show “that Apache knew, but did not care, that it was mismanaging the drilling operation.”  The main consideration was that Apache took actions that showed it did care. The $52 million damage award was reversed.

This choice of law under this agreement was Louisiana. The predominant understanding of willfulness in Louisiana describes a degree of fault that falls short of intent to do wrong. The sufficiency of evidence standard is the same as in Texas (so says this Texas court).

Your musical interlude just in time for Memorial Day.

*Ashley is a 2L st SMU law school and a Gray Reed summer intern.