pancake 3North Shore Energy v. Harkins interpreted an Option Agreement between landowners and a producer over a 400 acre tract. In football they would say the Texas Supreme Court pancaked the plaintiff. In the law, some would call it business as usual.

What the court really did?

A contract interpretation case might have little interest to most readers, what with the “doctrine of last antecedent” and such. The significance is that the court, as it has the power to do, reversed and rendered, substituting its interpretation of a contract in place of two lower courts and a jury verdict awarding the producer $709,000 in actual damages, $1.148 million in punitives, and $400,000 in legal fees.

The heart of the dispute was whether a certain 400 acres was included in the Option.  The trial court construed the contract in favor of the producer. There was a jury trial on the producer’s tortious interference and breach of contact claims. The court of appeal sent the case back to the trial court, holding that the contract was ambiguous and thus, interpretation of the description was a fact issue. The Supreme Court held that the description was not ambiguous and interpreted the contract in favor of the defendant landowners.

The facts 

The agreement described a 1,210 acre tract out of a 1,673 acre tract described in an oil and gas lease with Hammon (sic). So far, so good.  The oil and gas lease described 1,273 acres out of the 1,673, SAVE AND EXCEPT a 400 acre tract.

North Shore exercised the option on 169 acres, which happened to contain a portion of the 400 acres.  North Shore drilled its well on the Hammon tract. Not good.

Along comes Dynamic, who, concluding that North Shore didn’t have the right to lease the 400 acres, took a lease from the family. North Shore sued everybody to quiet title to the Hammon lease tract and to reform the Option Agreement.

The court concluded that the description of land in the Option Agreement did not include the 400 acres.

How the court interprets a contract

The high court considered the contract in light of the circumstances surrounding its execution to determine whether it was ambiguous. North Shore paid $144,000 for 2,886 acres, which is $50 per acre; thus, they concluded that North Shore only optioned 1,210 acres.  This would exclude the 400.

The Option was a legally enforceable selection agreement, but it didn’t give North Shore the option to choose any 1,210 acres out of the 1,673.

The court considered the doctrine of last antecedent (English majors, see page 8 for more). The court then considered the word “being”.  The two “beings” in the description were a correlative pair that refer to the same object – the 1,210 acres.  (See page 7) The court then looked at “and” as a conjunction. The court concluded that the family and Dynamic’s interpretation was the only reasonable one.  The Option referred specifically to the lease, which explicitly excluded the 400 acres. Thus, the plain language of the Option specifically excluded the 400 acres. With that, the damages and attorney fees went away.

Leonard Cohen RIP. IMO his writing was better than his singing, so we have a cover of a wonderful song.

burning moneyMEMORANDUM

From: Legal Department

To: Accounts Payable

Re: What we learned from Shell Western E&P, Inc. v. Pel-State Bulk Plant, LLC

________________________________________________________________________

Just received notice of a Texas subcontractor’s mineral lien? DO NOT continue to pay the contractor. He hasn’t paid the subcontractor. Think you owe nothing on the well on which the lien will be filed? Think what you owe the contractor is not related to the lien? Both good questions, but it might not matter.

If your contractor is insolvent you’ll pay twice, and your standing with the boss will take a major hit.

________________________________________________________________________

Under Chapter 56 of the Texas Property Code a property owner receiving a mineral subcontractor’s lien notice may withhold payment to the contractor in the amount claimed until the debt on which the claim is based is resolved.

Pel-State was a subcontractor for frac jobs in 11 Shell wells.  Pel-State sent Shell a notice that the contractor was not paying for the sub’s work and then perfected a mineral lien.

The dispute was whether the lien amount was $3.19 million or $713,000. The mineral property owner is not liable to the subcontractor for more than the amount the owner owes the original contractor when the notice of lien is received.

A lesson on the Master Service Agreement 

The source of Shell’s misery was its Master Service Agreement with the contractor. When Shell received Pel-State’s lien notice Shell owed the contractor $11 million and thereafter continued to make payments to the contractor.  Bad call.

Shell owed nothing to the contractor on what it considered to be the contract under which Pel-State claimed a lien. Shell owed only $713,000 for the wells on which Pel-State performed work.

Under the MSA no specific work or a price was agreed upon. Those were determined by separate work orders for each job.  The court concluded that the multiple work orders under the MSA comprised a single contract. Where several instruments executed contemporaneously or at different times pertain to the same transaction they will be read together although they did not expressly refer to each other.

What about the Property Code?

Under Section 56.006 the operator cannot be liable to a subcontractor for an amount greater than the amount agreed to be paid under the contract for furnishing material or labor.  Because the MSA was one contract, the court rejected Shell’s argument that a lien should only apply on the work orders for the wells upon which Pel-State provided work.

Pel-State was entitled to collect from Shell for all work performed under the Shell/contractor MSA, under which Shell owed $11 million. The court affirmed Pel-State’s $3.19 million recovery.

Section 56.043 – a safe harbor

This provision, if used properly, protects the operator from liability.  But he has to stop paying the contractor once he receives a notice. Under this opinion, any limitation on the amount of the subcontractor’s lien must be determined by the state of the account between the property owner and the operator, not by amounts that might be owed on a particular work order or field ticket.

Musical interlude – more Bob

Can’t get enough of Bob Dylan songs of loss, sadness and unrequited love, especially when he’s not singing?

Tomorrow is a Long Time

Boots of Spanish Leather

Farewell

godzillaWe begin with a Rorschach test. As the big election day approaches, which candidate do you see in the photograph? Discuss among yourselves.

Get ready for lots of musical interludes. The nation’s despair runs deep and wide, so profound that it cannot be expressed in mere words.

What do they promise?

Let’s look at what we might expect from our next president, based on campaign promises:

Mr. Trump:  Make oil and gas great again,

Ms. Clinton:  Wind on every hilltop, solar on every rooftop; renewables good, fossil fuels bad,

From Scott Gaille’s energy blog,

From Forbes.

And again from Forbes.

This is a way to evaluate the promises (a/k/a, don’t get your hopes up).

Your choices

You know what they are. It’s been said that one is reptilian, and the other venal (that’s Hillary in the middle; Nancy Pelosi on the “left”; Harry Reid, in drag and a wig, on the other side).

Here is P. J. O’Rourke’s choice.

Speaking of choices, here is how to survive election day:

  • Remain in the fetal position where you’ve been since the primaries, and continue to weep.
  • Surrender your belt and shoelaces to someone you trust.
  • Still undecided? Here is some advice.

Takeaways

  • This will pass. We survived Millard Fillmore and Warren G. Harding.
  • Special shout-out to you Trump primary voters! You vanquished those liberals and insiders like Ted Cruz, Marco Rubio and Mike Huckabee. You owe the party faithful.

 

chess2The lessons in Craddick Partners Ltd. v. EnerSciences Holdings, LLC are three: Parties who have not signed an agreement to arbitrate have standing to compel arbitration; artful pleading to avoid arbitration won’t work; and Texas courts remain eager to send cases to arbitration.

EnerSciences’ two subsidiaries sell products in the oil field. Tom Craddick approached EnerSciences to sell products to Craddick’s Permian Basin clients. EnerSciences created PB Ventures as a subsidiary through which Craddick would sell their products.

A sales agreement between Craddick Partners and PB Ventures compelled arbitration of all disputes, excluding claims “brought by either party seeking injunctive, declaratory or preliminary relief”.

Pardon me while I digress

Some parties agree to litigate some claims and arbitrate others. Why? Don’t do it. It only complicates matters, potentially increasing the cost of the dispute by fighting it in two different places. And injunctive relief is addressed by the courts and the rules of the arbitration bodies.

The dispute

Craddick Partners sued PB Ventures, EnerSciences, and its two subs, asserting negligent misrepresentation, negligence, and tortious interference (all of which are torts), and seeking a declaration that the sales agreement had terminated.

The defendants, no doubt seeking to avoid a generous portion of hometown justice, sought arbitration, alleging that Craddick artfully pleaded tort actions to avoid arbitration and that the claims were really for breach of contract. Craddick said the EnerSciences parties were non-signatories to the sales agreement and thus lacked standing.

“Direct-benefits estoppel”?

The doctrine permits a non-signatory to compel arbitration of a signatory’s claim “if liability arises solely from the contract and must be determined by reference to it”.  Said the court, a “meddlesome stranger” cannot compel arbitration by merely pleading a claim that quotes someone else’s contract. A party can’t have it both ways:  on one hand seek to hold the non-signatory liable for duties imposed by an agreement with an arbitration provision, but on the other hand deny arbitration because a defendant did not sign it.

The court denied Craddick’s argument that its claims arose from general obligations imposed by law (the tort claims). All of Craddick’s claims depended on the existence of the sales agreement. The claims not only made reference to or presumed the existence of the agreement but relied upon it for viability. EnerSciences had no obligations to Craddick other than those arising out of the contract.

A factor in the tortious interference claim was that the non-signatories were so close to the contract that they were an integral component of it; they were affiliates, and not strangers to the agreement.  Craddick could not avoid arbitration by recasting its claims as tortious interference. That claim also relied on the sales agreement for viability.  If PB Ventures had not breached the sales agreement there would be no tortious interference.

Fancy pleading doesn’t help

The court concluded that the declaratory judgment request was merely an artfully pleaded breach of contract claim. To render a declaratory judgment the court would have had to determine whether PB Ventures breached the sales agreement.

To appreciate today’s musical interludes, consider what early 1950’s  mainstream radio sounded like. Along came Chess Records with Chester Burnett, McKinley Morganfield and plenty of others.

So, Phil Chess RIP.

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

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

The events unfold

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

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

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

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

Judgment affirmed

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

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

REVISION: What’s new about this opinion?

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

Obvious musical interlude

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

the acoustic love song Bob

the acoustic protest song Bob

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

 

frac trailerCo authors David Leonard and Austin Carlson

If you were able to keep your frac trailers from the clutches of your avaricious creditors during the past several unpleasant years, you could be in luck. Owners and lessors of frac trailers may be entitled to a refund for sales tax paid in connection with the purchase, lease, service, or repair of the trailers.

How did this happen?

This new guidance arises from an audit of FracCo (the company was anonymous) in which the Texas Comptroller imposed a tax bill of $9.3 million, plus $1.6 million in interest.  FracCo argued it was entitled to a credit because it had erroneously paid sales tax in connection with the purchase of the trailers.  The trailers consist of a radiator, engine, transmission, and pump, all mounted on a base trailer, and include fuel tanks and racks to carry high-pressure iron and discharge hoses.

FracCo purchased and/or leased its trailers from an affiliate—thereby creating a taxable event.  FracCo argued motor vehicle taxes applied to this transaction; the Comptroller disagreed and argued sales and use taxes applied because the frac trailers were not “motor vehicles”.

The ruling

An Administrative Law Judge decided in favor of FracCo. The frac trailer qualifies as a motor vehicle because it was designed to tow and carry property separate from itself—i.e., the high-pressure iron and discharge hoses.  See 34 Tex. Admin. Code § 3.08(a)(2).

What are the implications?

In a word, significant for some.  Texas imposes a general sales and use tax as well as a motor vehicle sales tax. Each has significantly different rules and applications.  The sales tax is applicable to purchases, leases, and repairs.  In contrast, the motor vehicle tax applies only to purchases, not to leases or repairs.

If you have paid sales and use tax on the lease or repair of a frac trailer, you may be entitled to a refund.

Read this and know what to do

To avail yourself of a refund in light of this ruling:

  • determine whether you have paid sales tax in connection with the purchase, lease, service, or labor of a frac trailer.  If so, then,
  • determine whether the frac trailer is constituted in the same or similar manner as FracCo’s. This is to insure it qualifies as a “motor vehicle” for tax purposes.

If sales tax was paid on a qualifying trailer, request a refund from the Comptroller as soon as possible.  To request a refund, a taxpayer must:

  • Submit a written claim detailing each reason for the refund;
  • Identify the time period during which the claimed overpayment was made; and
  • Submit the claim within the limitations period (generally four years from the due date).

In response, the Comptroller may request documentation, such as accounting data and sales paperwork. If the Comptroller denies the refund, the next step is to request a refund hearing within 30 days of the denial.

Can’t get enough of those girl singers

One you should know and one you probably don’t.

wolfEffective this past August 3, the EPA has new regulations for methane and volatile organic compound emissions from oil and gas operations  As you know, reducing methane emissions is a key component of the President‘s climate change agenda.

Why should I care?

Because if you own or operate an oil and gas production, processing, transmission or storage facility, you will be required to comply with the new rule by no later than June 3, 2017. Other than that, don’t worry, be happy, and continue to go about your daily business in blissful ignorance of the impending regulatory burden.

What does it mean?

More expenses for operators of the aforesaid facilities, more demand for good inspectors, more operations for the EPA to meddle in oversee, and a risk of fines for a substantial failure to comply, whether willfully or by inadvertence.

Last weekend I heard Keith Kottrill of Innovative Ventures present a synopsis of the new standards.

The summary is an attempt in 22 pages to capture the spirit and effect of the new rule. It was not prepared by a lawyer and is not intended as a legal analysis. It is the product of Keith and his colleagues who will be implementing and conducting the on-site testing required by the rule. It should be viewed, relatively speaking if you aren’t an engineer, as a good place to begin to understand the rules.

Highlights

  • Get familiar with the term “Quad Oa”, an informal reference to the new rule.
  • There are two main parts of the rule: Control devices or practices must reduce methane and VOC emissions from certain equipment by 95%, and fugitive emission leak detection and repair (LDAR) applies only to well sites and compressor stations.
  • The rule applies to “affected facilities”, specific types of equipment or facilities that are new, modified, or reconstructed after September 18, 2015. Beware, those terms have certain, definite meanings under the rule.
  •  There will be a reporting and paperwork burden.
  • Look forward to quarterly inspections of some midstream facilities.
  • Generally, repairs must be made within 60 days.
  • See pages 13 and 14 for the EPA’s estimated industry-wide costs of compliance, including projected economic benefits. Honk if you believe the costs will be far higher.
  • The rule is based partially on a model called the the “Social Cost of Methane”, and the “methane-related monetized climate benefits” of the rule. Honk twice if you believe those models are based more on ideology than on science.

Time will tell how this rule will work. Among other things, supporters and detractors alike will learn the true extent of methane leakage in our oil and gas infrastructure.

A musical interlude

Today, girl singers you might not have heard of:

 

buckwheatIn a case displaying the tactics of anti-fossil fuel advocates, Earthworks’ Oil & Gas Accountability Project v. New Mexico Oil Conservation Commission, a court rejected a challenge to the Commission’s amendment of the “Pit Rule”.  This post is not so much about the Pit Rule itself as it is the absence of legal and factual support for the appellant’s arguments. In case you’re interested, the rule governs pits, closed-loop systems, and below-grade tanks and sumps used in connection with oil and gas operations for the protection of fresh water, public health and the environment.

Lack of Authority? No

Claim:  The Commission had no authority to amend the rule because of a pending appeal of the original rule – the one being amended. No authority was cited.

Result: Earthworks conflated the Commission’s rule-making authority and its adjudicative authority, which was improper.

Arbitrary and Capricious? No

Claim:  The rulemaking was arbitrary and capricious.  To succeed on this claim, the opponent must prove that a rule was beyond the authority of Commission, was not in accordance with law, or was unreasonable and without a rational basis.

Result: The Commission had denied Earthworks’ request to take notice of certain of its prior records; Earthworks asked the court to take notice of records anyway, but again cited no authority to support the position.  The Commission elected not to respond to every concern raised by Earthworks. The Commission’s detailed summaries of its findings were satisfactory.

Economic development is a legitimate basis for a rule 

Claim: The Commission acted improperly by promulgating the rule in order to further economic development.

Result: The Commission acted within its statutory authority when it included economic considerations in its stated reasons for the rule. The Oil and Gas Act and the Commission’s regulations give due consideration to economic factors, and authorize the Commission to do whatever is reasonably necessary to carry out the purposes of the Act.  Economic considerations cannot be the sole purpose for creating or amending a rule, but found no indication that economic considerations were the primary purpose behind the rule.  The Commission cited many reasons why the rule was necessary, including encouraging reuse and recycling of oilfield fluids and reducing surface impacts.

Cost-saving is a legitimate purpose for a rule

Claim: The order adopting the 2008 Rule stated that the Commission had made all changes it could to lessen potential effects on small businesses while still protecting fresh water, human health and the environment. Thus, it was argued, because all possible measures were taken in 2008 there could not be any more cost-saving measures to be made in 2013.

  • Result:  Denied; no factual basis was cited.

Inadequate notice? No

Claim: Public notice of the rule was inadequate.

Result: Again, no authority was cited.

Takeaways

  • Was this suit more to obstruct than obtain legal recourse?
  • Who funds these efforts?
  • What lawyer has the temerity to assert serial arguments citing no authority?

Stanley Dural a/k/a Buckwheat Zydeco RIP.

He did the zydeco

and the N.O R&B.

jackie robinsonMy blogging sensei Cordell Parvin says the title should always inform the reader of the content. Mea culpa on this one; I couldn’t resist the alliterations.

Some time back I reported on Carlton Energy Group et al v. Phillips et al.  See that entry for the facts and a Texas Supreme Court opinion. In this new opinion from the court of appeal, the trial court was vindicated and the rest of us learned more about determining fair market value and lost profits.

A brief history

The trial court awarded Carlton $31.16 million in actual damages after finding that Phillips and EurEnergy tortuously interfered with Carlton’s contract with CBM. The court of appeal reversed and rendered judgment for $66.5 million in actual damages. The Supreme Court suggested a remittitur to the $31.1 million, which Carlton accepted.

In this appeal Phillips reiterated without success that the evidence was factually insufficient and asked for remand to the trial court for a do-over. Lawyers: See the inside baseball analysis of legally and factually sufficient evidence.

Arriving at fair market value

Carlton’s damages focused on the fair market value of Carlton’s interest in the Bulgarian gas exploration project: What would a willing buyer pay a willing seller, neither acting under any compulsion?

FMV is generally determined by:

  • comparable market sales,
  • replacement costs less depreciation, or
  • capitalizing net income – that is, profits.

And lost profits 

The lost profits were not themselves sought as damages, but were used to determine the FMV of the project. The court had this to say about lost profits:

  • Profits can be recovered only when the amount is proved with reasonable certainty.
  • The reasonable certainty requirement is intended to be flexible enough to accommodate the myriad circumstances in which claims for lost profits arise.
  • It is impossible to announce with exact certainty any rule measuring profits, the loss for which the recovery may be had.
  • What constitutes reasonably certain evidence of lost profits is a fact-intensive determination.
  • At a minimum, opinions or estimates of lost profits must be based on objective facts, figures or data from which the amount of lost profits can be ascertained.
  • Uncertainty as to the fact of legal damages is fatal to recovery, but uncertainty as to the amount will not defeat recovery.

The damages were in great part determined by extrapolating from the Carlton/Philips agreement to the total value of the project. That the agreement was never consummated did not deprive it of evidentiary value. Having made an agreement for certain price, which determined the value, Phillips was pretty much stuck with that valuation.

Trial strategy and the suicide squeeze

An earlier post compared a defendant’s election not to offer his own damage evidence to the suicide squeeze. In this one – unlike Jackie Robinson – the defendant was out at the plate. Phillips presented no FMV evidence of his own, choosing rather to attack Carlton’s experts.

Gearing up, musically, for the World Series.

While we’re at it, … go ahead and squander just a teeny-bit more time and then back to work.

stratigraphic formation

Co-author Brooke Sizer

How many of your mineral conveyances are described like this:

… all of Sellers’ right, title and interest in and to (a) the oil, gas and other minerals in, to and under the lands … ONLY INSOFAR as such oil, gas and other minerals are located below that depth which is the stratigraphic equivalent of the base of the Cotton Valley formation and the top of the Louark Group defined as correlative to a depth of 10,765′ in the Winchester Samuels 23 # 1 well … and correlative to a depth of 9,298′ in the Tenneco Baker # 1 well …

The dispute

BRP’s predecessor, IP, sold mineral rights in 13,000 acres in DeSoto and Bienville Parishes to Chesapeake with just that description.  When BRP later went to sell more, Chesapeake claimed that the agreement conveyed rights to the Bossier Shale (lying above the Louark Group), as well as the Haynesville. BRP countered that only rights in the Haynesville Shale and lower depths were sold, thus BRP retained all interests above the top of the Louark Group. BRP LLC (Delaware) v. MC Louisiana Minerals LLC, et al. ensued.

The negotiations

The trial court could not ascertain the common intention of the parties in the IP assignment from the words of the assignment itself. So the court considered parol evidence. On one hand, the parties only talked about rights to the Haynesville Shale, and BRP believed that only the Haynesville was below the Cotton Valley formation. On the other, email from Chesapeake referenced its intent to buy all rights below the Cotton Valley.

Big fact:  No geologist was consulted about the description.

A formation is not a monument 

BRP argued that the rules governing surface limitations on servitudes apply to dividing mineral servitudes by depth. In determining the location of a boundary on the land the most important factor is natural monuments.  BRP urged that the “base of the Cotton Valley Formation” and the “top of the Louark Group” are natural monuments. That argument was unsuccessful.

Experts testified that subsurface formations do not have the permanence of natural monuments on the surface: “The location of formations and groups are subject to disagreement among geologists, and the general thought about their location can vary over time…., for this reason, stratigraphic markers, such as the well depths used in this case, are the more commonly used in the oil and gas industry.”

BRP’s problem was that the base of the Cotton Valley and the top of the Louark Group are two different boundaries and are separated by the 500 to 600 foot thick Bossier Shale.

The result

The trial court judgment in favor of Chesapeake was affirmed.

  • The stratigraphic markers represented by well depths were sufficient for designating the minerals conveyed. The depth limitation language was self-defining.
  • IP had been in a position to complete the due diligence necessary to protect its interests.

What does this case mean to you? 

  • If you talk geology, make sure your geologist is on the team.
  • IP’s dealmakers didn’t understand the geology of the formations.
  • Good try BRP, but as successor you were stuck with IP’s description, and their lack of knowledge.

The (almost) perfect musical interlude

Les was overheard last week crooning this mournful tune to his Tiger fanbase. Was it too soon?