nightmareYou might conclude that the but-for-the-grace-of-God-that-could-be-me nightmare presented in In re: RPH Capital Partners is instructive only for lawyers. If so, you would be mistaken. The lesson: If you want to win the lawsuit, pay attention to pesky legalities such as notices of trial settings. Likewise, if you want to protect your hydrocarbons, reinforce your people and processes for maintaining leases and other significant obligations.

RPH sued Peridot and others for failing to make payments under a participation agreement and for selling interests in properties they didn’t own. The defendants didn’t appear for the trial.  A default judgment for $13 million was taken.

After RPH began garnishing bank accounts Peridot filed a petition for bill of review, contending it never received a copy of the judgment. Peridot had only 38 days’ notice of the trial (the law requires 45), so Peridot argued it was deprived of its due process rights.  The trial court ordered a new trial.

Everyone agreed that Peridot did not receive enough notice of the trial, but was the notice so insufficient that it was a violation of fundamental due process rights? No. Peridot waived that complaint when it took no action after it received less than 45 days’ notice.

The case then turned to whether Peridot’s failure to appear was not intentional or the result of conscious indifference, but was due to mistake or accident.  The court never got to whether there was a meritorious defense.

To prove that the failure to appear was not intentional or the result of conscious indifference there must be “some excuse, although not necessarily a good one.”  Forgetfulness alone is insufficient, but excuses that are acceptable are, for example, bad weather and misplacing the citation due to staff turnover.

Peridot’s counsel “did not see” the trial setting and no one in the office docketed the trial date. The deficiency in counsel’s affidavit was that it didn’t explain the failure to appear at trial and offered no description of circumstances that could explain why he took no notice of the trial date.  Finally, the affidavit failed to address other instances showing Peridot had notice of the trial date. Peridot did not establish that its failure to appear was not intentional or a result of conscious indifference.

What does this have to do with me?

The lesson for the lawyer is obvious. What if you run a land department?  You should be good to go if you have people and processes in place to assure that obligations such as delay rentals and royalty payments are made. And while you’re at it, who is paying attention to debilitating lease provisions (the ones the lessor would never even consider enforcing, until he does), such as lease termination for failure to timely pay royalties?

Musical interlude: For the trial judge who has been reversed.

flea flickerWestport Oil & Gas Company, L.P. v. Mecom et al. presented this question: Was the lease royalty based on a gas purchase agreement formula or on the royalty clauses’s market value at the well provision?

Spoiler alert: Invoking the seminal Texas Supreme Court decision in Texas Oil and Gas Corporation v. Vela, the court went with market value at the well.

Dueling paragraphs

Under Paragraph 3, the royalty clause, gas royalty was 42 percent (not a typo!) of the “market value at the well … “.

Paragraph 17: “Notwithstanding any other provision of this lease to the contrary … a contract for the sale of gas … shall provide for the sale price computed on the average of the highest price paid by three separate Intrastate Purchasers of gas of like quality and quantity in [RRC] District 4 …”.

The court instructed the jury to compute the gas royalty’s market value based on Paragraph 17. The jury found that Kerr McGee failed to pay those royalties and awarded millions in damages and attorney fees.

The Court’s analysis

Mecom argued the significance of “Notwithstanding any other provision” language. Ignoring Paragraph 17, requiring that the three highest prices become the formula to calculate the market value, renders the paragraph meaningless.

Kerr McGee argued that the Paragraph 17 formula pertained only to future gas purchase agreements and did not alter the commonly accepted meaning of “market value at the well” as stated in Paragraph 3.

The court concluded that the royalty provision is not “contrary” to the gas purchase agreement provision and did not elevate Paragraph 17’s price mandate over Paragraph 3’s market value provision. Paragraph 3 defined the royalty owed and Paragraph 17 set a minimum contract price for future gas purchase agreements. Nothing more.

Remembering Vela

In that case the working interest owners sold gas at a price fixed by a gas sales contract. The market value of gas at the wellhead rose to be far in excess of the gas contract price.  The lease specified the royalty would be “1/8th of the market value … ”. The royalty owed was determined from the royalty provision, which was wholly independent of the gas contract. The court declined to conflate the gas contract price with the market value requirement. Victory for the royalty owner.

… and Yzaguirre

Bastard child of Vela (if you are a royalty owner). This time the market value measure worked for the lessee. The gas purchase price was far in excess of the market value.

What did we learn?

  • The lease dated to 1974. As with Godzilla, leaky shower pans, and a flea flicker in the fourth quarter, dangerous situations can lie dormant for a long time, bringing misery when the victim least expects it.
  • Despite the lessors’ best efforts to protect themselves, the case turned on one short phrase in a comprehensive, three-page royalty clause.
  • “Notwithstanding anything to the contrary … ” is a favored device for scriveners. Make sure it addresses that which you are trying to protect. What if Paragraph 17 had addressed the market value clause directly?

Merry Christmas.

It’s a multiple choice question:

a.  The royalty interest reserved by the lessor.

b. The drillbit, courtesy of fearless, risk-taking entrepreneurs, the backbone of the great American free enterprise system and the sworn enemies of collectivism.

c.  A cache of DNC emails, discovered by Vladimir Putin himself.

d.  The working interest.

e. It doesn’t matter. Trump won. Get over it.

Can’t stand the suspense? It’s “d”. If the override doesn’t spring from the working interest, you don’t have it.

How did this happen?

EnCana Oil & Gas (USA) et al v. Brammer Engineering et al involved a Power of Attorney under which Brammer would manage minerals for the mineral owners. Terms in the POA regarding Brammer’s compensation:

  • “. . . mineral leases executed in the future by Agent . . . will provide for the reservation of an additional free overriding royalty interest on behalf of the lessors.”
  • Brammer’s compensation would be “on . . . leases under the terms of which not less than 1/16th override royalty is reserved, [Brammer] shall be entitled to 1/32nd free overriding royalty”.

WW&M represented other mineral owners. With Brammer’s permission WW&M negotiated a lease with EnCana with a 1/4th royalty. The lease did not include overriding royalty language Brammer believed it was entitled to, so Brammer executed the lease and an assignment of a 1/32nd override in favor of itself out of the lessor’s royalty.

Then, the litigation 

The mineral owners’ point: Brammer didn’t carve the override out of the working interest and thus was not entitled to it.

Brammer’s response: The additional override was a contractual obligation payable to Brammer from the total royalty reserved in the lease.

The court decides

If Brammer obtained any lessor’s royalty greater than 1/8th, was it entitled to an override, or was Brammer required to expressly reserve an additional free override for itself?

Brammer had to expressly reserve an additional royalty interest for the mineral owners in order to trigger its right to the override. To the court, Brammer redefined “royalty” to mean the standard royalty, whatever that standard might be at any given time. This would require the court to look beyond the words of the unambiguous contract. Further, to the court, “additional” means an override in addition to the lessor’s royalty.

Stated another way: Brammer argued it was entitled to a 1/32nd override anytime that it acquired, in favor of the mineral lessors, at least 1/16th more than the “typical” 1/8th. This, it did not do. Brammer did nothing to obtain the 1/4th royalty in WW&M’s bid package. Judgment for the mineral owners.

What is an overriding royalty anyway?

The Mineral Code does not expressly define an override. Citing plenty of authority, the court concluded that the term describes a royalty carved out of the working interest, different from and in addition to the lessor’s royalty.  This is acknowledged in Brammer’s assignment language:  “It is hereby reserved in favor of Brammer . . . from the Lessors’ royalty . . . a free overriding royalty 1/32nd of  . . .  .”

Have a happy holiday.

omegaAre Louisiana courts as enamored with arbitration as their Texas counterparts? Looks like it. East of the Sabine, submitting your dispute to arbitration means you are pretty much saying adieu, farewell and bye-bye to a judicial mulligan.

In ExPert Oil & Gas, LLC v. Mack Energy Co., et al an arbitrator’s mistaken calculation did not nullify an arbitration award.

Round one

ExPert was the operator under a participation agreement and JOA. An audit of the joint account found that some expenditures were unauthorized and should be repaid. Neither party agreed with the auditor’s report and the matter was arbitrated. After an eight day hearing the arbitrator rendered a reasoned award ordering ExPert to credit $1.5 million to the joint account.  The district court, First Circuit, and Louisiana Supreme Court confirmed the arbitration award.

The real issue

After the Supreme Court affirmed the judgment confirming the award, the arbitrator revealed “that he committed gross professional negligence when performing the calculation of three categories of credits in the arbitration award” (so said ExPert). Those credits totaled $434,000. Never shirking a good fight, ExPert sued, alleging that the judgment was a relative nullity because of “ill practices”, referring to the arbitrator’s admission of his mistake. Accepting all facts in the petition as true, the question was whether ExPert was legally entitled to relief.  A judgment may be annulled by fraud or ill practices but not for mere error. La. Code Civ. P. 2004(B) is sufficiently broad to encompass all situations in which a judgment is rendered through an improper practice or procedure.

“Ill” practices?

Ill practices includes any improper practice or procedure which operates, even innocently, to deprive a litigant of a legal right. There are two criteria to determine whether a judgment was obtained by actionable fraud or ill practices:

  • The circumstances under which the judgment was rendered showed the deprivation of legal rights of the litigant seeking relief; and
  • Enforcement of the judgment would be unconscionable and inequitable.

The punch line

The court declined to vacate the award: By substituting arbitration for litigation, the parties are presumed to accept the risk of procedural and substantive mistakes by the arbitrator of either fact or law, which are not reviewable by the courts. ExPert failed to state a cause of action for nullity of the original judgment.

Questions, observations and one thing to ponder

  • Would the result have been different if the error had been presented during round one? The reasoning suggests it would not, but the court doesn’t say.
  • Could the error been discovered sooner, especially with a reasoned award?
  • If the amount in controversy allows, go with three arbitrators for a better chance of an error-free award.
  • Despite this unfortunate result, arbitration has its advantages.
  • Should Mack have just acknowledged the injustice and agreed to return the $435,000? Would you?

A musical interlude for the case.

And one for Christmas Advent.

perpetuityToday we venture into Oklahoma, to be instructed on the Supreme  Court’s treatment of the Rule Against Perpetuities. First, the Rule: No property interest is good unless it must vest, if all, not later than 21 years after some life in being at the creation of the interest.

In American Natural Resources LLC v. Eagle Rock Energy Partners LP, et al, Eagle Rock’s predecessor (Encore) and ANR entered into a participation agreement with an AMI. Eagle Rock drilled and completed 17 wells without allowing ANR to participate. In response to ANR’s tortious interference and breach of contract suit, Eagle Rock said that the Rule Against Perpetuities prevented enforcement of this option: “In all subsequent wells within the AMI, ANR shall have the right to participate in the prospect area with a . . . 25% working interest . . .”

ANR responded: The Rule doesn’t apply to operating agreements and doesn’t apply to the option because oil and gas production is always of limited duration.

The court’s analysis

The court observed that the Rule applies to property rights but not to contracts, which are personal, and found cases involving JOAs and leases that fell on both sides. The question was, Does this option provision create a property right subject to the Rule?  The court’s answer was yes.

Options in mineral leases do not violate the Rule because leases and JOAs have a built duration not necessarily tied to the cessation of production. But this AMI was a stand-alone document, and the option applies to participation in wells drilled in the future, as well as existing leases. ANR could participate in future wells even if production ceased and then restarted.  The option allowed ANR to participate in future wells if production ceased and then restarted under new leases and new JOAs. as well as existing leases. As such it is subject to the Rule.

An LLC is not a “life in being”

ANR argued that a single member limited liability company with a 30 year duration should be disregarded as an entity.  The court responded: A corporation might be a person, but it is not a “life in being”.  The only measurable “life in being” in the case of a corporation is a term not exceeding 21 years.  A provision with an immeasurable life in being that vests or distributes after 21 years violates the Rule and is void. ANR asked the court to rely on the disregarded entity doctrine used for federal tax purposes. The court said they were not dealing with federal taxes, but with contractual rights.  Thus, an Oklahoma LLC is a legal entity separate from its owners.

Speaking of Oklahoma, Leon Russell RIP.

Lagniappe

For extra credit, learn more about the Dakota Access Pipeline.

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