We begin with a philosophical question: Should a person be rewarded for bad behavior? Despite twerkee Miley Cyrus (and her daddy), the Kardashians and, at least for a while Richard Nixon, the answer should be, no. Texas law agrees.

The express negligence doctrine in indemnification agreements “… mandates that the party use express language within the four corners of the contract specifically stating that the party will be indemnified for liability arising from the party’s own negligence.”

So said Hamblin v. Lamont, a companion case to Lamont vs. Vaquillas Lopeno Energy, et al, For background and a discussion of the facts, go to my recent post discussing Lamont v. Vaquillas.

When Lamont separated from Ricochet Energy and Hamblin, the parties signed a separation agreement containing a broad and comprehensive indemnification provision in which Ricochet and Hamblin agreed to indemnify Lamont against

“… any and all liabilities, obligations or claims arising from any act, occurrence, omission or otherwise which occurs after the Effective Date of this Agreement which in any way pertains to Ricochet Energy, Inc. and/or its operations, actions and in actions. It is the intention of the Parties that Ricochet Energy, Inc. to provide as broad of an indemnity as possible and all ambiguity as to whether Hamblin and Ricochet Energy, Inc. owe the duty of indemnification shall be resolved in favor of providing the indemnity/indemnification.”

In a second paragraph, Hamblin and Ricochet agreed to assume all of Ricochet’s obligations and agreed to indemnify Lamont against past liabilities, using languge virtually identical to the first.

Lamont was found by a jury to have committed intentional torts and the jury awarded Vaquillas several million dollars in damages.

The court denied Lamont’s request for indemnification on the basis of the express negligence test, asking whether the parties intended to protect Lamont from his own actions.

The decision reversed a trial court summary judgment in favor of Lamont. The problem with the language was that Ethyl Corp., Dresser Industries, Flour Corp. and other express negligence cases from the Supreme Court talk in terms of negligence. The court viewed the case in light of the public policy against excuplating a party from the consequences of its own negligence.

According to the court, the concerns associated with such extraordinary risk-shifting in negligence cases cases should apply “with equal or greater force” to intentional torts.

Because the contract did not specifically state an intent to indemnify Lamont for liability arising from his own intentional torts, Hamblin and Ricochet had no obligation to indemnify Lamont for liability arising out of the Vaquillas lawsuit.

The dissent focused on the absence of Texas Supreme Court cases applying the express negligence test to intentional torts, and would have ordered indemnification.

I would expect Lamont to take this one to the Texas Supreme Court. Whether the court accepts it is another question. The result looks pretty fair to me.

Merry Christmas!

It was a triumph of hysteria over common sense, a thrashing of science at the hand of ignorance, capitulation to a small but loud minority of NIMBY protestors. The City of Dallas has passed one of the strictest drilling ordinances in the country. 

The ordinance amounts to a defacto ban on future drilling because of the requirement that no well can be closer than five football fields from a home, school or other “protected use”.  For perspective, walk off 1,500 feet down the street in front of your house and ponder whether such a distance is necessary if the real goal is to balance the interests of homeowners with those of mineral owners and the taxpayers.  

Other essentially sound provisions are rendered meaningless by the 1,500 foot setback:

  • Requirements for base line sampling and testing of air, soil, ambient noise levels, water wells and surface water and an initial gas analysis or raw gas produced.
  • Limitations on noise levels and requirements for noise mitigation.
  • Limitations on hours of operation of different phases of drilling.
  • Requirements on inventory of hazardous materials and chemicals.
  • Required tagging of fracturing fluid to enable tracing of the fluid to a specific pad site.
  • Incident-reporting requirements.
  • Site maintenance requirements.
  • Requirements for reduced emission completion techniques.
  • Required emissions compliance plan if a site receives two or more air quality violations in any 12-month period.
  • Provisions for seismic survey permitting.
  • Regulation of pipelines.

One need only to look at our neighbor to the west, Fort Worth, with its 6oo-foot setback, for evidence of an ordinance that allows safe and profitable drilling operations.  In Dallas, the council even ignored the recommendation of their own task force comprised of citizens from both sides of the debate for a 1,000 foot setback.

The winners and losers

The losers aren’t oil and gas operators. I was asked, What will the drillers do now? That’s easy: Take their sizable job-producing and tax revenue enhancing investments elsewhere.

The losers are Dallas taxpayers, whose leaders have left potentially large tax revenues and royalty income in the ground, and mineral owners, whose once-valuable assets will not be developed.

The winners are no-nothing environmental protestors. Their arguments have either been debunked or were not science-based in the first place. 

The cynic in me wonders if the Council tried to create another loser: Trinity East Energy, the producer who paid the city $19 million in lease bonus, to be told that no drilling permits would be issued.  One wonders if a “strict” regulation, rather than an outright ban, is calculated to give the City a leg up if Trinity East were to sue for the return of their bonus.     

My own council member Jennifer Staubach Gates and my friend Sandy Greyson, whose other decisions have been sound, voted in favor. I hope they will be stronger and smarter in the future.

It’s like we’re in California, but without the ocean views.

UPDATE: I found the song that perfectly reflects the council’s love for the environmental reactionaries and NIMBYs:

http://www.youtube.com/watch?v=yzRhrBCHiBU

 

Co-author Brooke Sizer

In Louisiana, in order to have a valid oral transfer of immovable property under Civil Code Art. 1839, two requirements must be met:

  • Delivery must be actual—physical possession must be in the transferee who claims title, and
  • Recognition by the transferor under oath.

In Harter v. Harter, mineral interests (which are immovables) were properly assigned because the transferor sufficiently admitted to the transfer and there was performance. 

The Facts – Sibling Rivalry Worthy of Jacob and Esau

Mailee Harter died and left four children: Steve, Mike, David, and Jan. Steve was named independent administrator of the estate. Each of the children was a residuary legatee owning a 1/4th interest. Steve, in his capacity as independent administrator, sued Mike. In settlement, Mike agreed to pay off three promissory notes and purchase the interest of Harter Energy, LCC for $1 million cash, transferring all interests to Harter Oil Company (owned solely by Mike). Mike also forfeited his interest in the estate and released all rights he might have against the estate and the remaining heirs or arising out of Steve’s handling of the estate.

David and Jan felt like Steve was mishandling the estate and after discussing the issues with Mike, David, Jan and Mike agreed that Harter Oil would sell a 25% interest to David and a 25% interest to Jan in the leases Mike had purchased from the estate. The sale price was financed by Harter Oil. In return, David and Jan agreed to sue Steve to remove him as independent administrator and any recovery would go to Mike.

Mike decided to sell two of Harter’s Oil leases. The purchaser discovered that David and Jan were working interest owners, so Mike instructed his employee to remove David and Jan from all of Harter Oil’s records. Mike then sent a note to David and Jan telling them that he was not satisfied with the progress of the suit against Steve and while he would continue to pay them $12,000 for the remainder of year, they would then need to reevaluate their deal. The suit with Steve was eventually settled. Mike sold the remaining leases.

David and Jan sued Mike in order to obtain their share of the sale price. (We aren’t surprised, are we?)

The Requirements Are Met

Mike’s actions constituted an actual delivery of the working interests, and internal records reflected a transfer to David and Jan. David and Jan were added to the ownership decks and portions of the money earned were applied to the loans. David and Jan were given monthly checks and 1099s and were kept informed of monthly production.

The Art. 1839 requirement of “recognition under oath” was satisfied by Mike’s admission of issuing monthly payments which were derived from the lease revenues, instructing an employee to make entries in the company’s internal records evidencing a transfer of 25% to each David and Jan and to add them to the ownership decks. This is despite his denial under oath of his intention to make the transfer. 

This was an appeal of an involuntry dismissal in favor of Mike the grantor, so the case was remanded.

Takeaway

Mommas and daddies, die broke; it’s easier on the kids. If you can’t die broke, raise your children to be less like Jacob.

The dude in the picture?  The undisputed King of Zydeco, Clifton Chenier, who died on December 12, 1987.

Co-author Brooke Sizer

Scoundrels often get away with their crimes by scamming lots of victims for small amounts, so that no single investor can afford to prosecute his claim. Big Rock Investors Association v. Big Rock Petroleum, Inc. was an unsuccessful effort by investors to clear this hurdle.

Big Rock Investors Association (BRIA) was created to prosecute claims by 226 investors of $26.8 million in Big Rock Petroleum drilling projects. The allegation was that it was a Ponzi scheme. Of 100+ projects, a substantial majority either never existed or Big Rock never had an interest in them.

On behalf of its members BRIA sued Big Rock for violations of the Texas Securities Act, breach of fiduciary duty, and constructive trust.  

No Association Standing.

BRIA could not withstand a challenge to its standing to sue because each member would have to present individual evidence to obtain the relief they sought. An association has power to bring suit on behalf of its members when: 

  • its members would otherwise have standing to sue in their own right, 
  • the interests it seeks to protect are germane to the organization’s purpose, and 
  • neither the claim asserted nor the relief requests requires the participation in the lawsuit of each of the individual members.

BRIA’s problem was the third prong, which focuses on administrative convenience and efficiency. Claims by an association are allowed when they will advance administrative convenience, efficiency and economy.  When each member would have to present evidence to prove their damages, the goals behind allowing suits by associations are undermined.

Generally, an association has no standing to sue on behalf of its members when the relief sought is monetary damages to individual members and when the damages are not common to the entire membership, nor shared by all to an equal degree.

The individuals didn’t share a common investment portfolio. Each investor would have to present their gains and losses—requiring a fact intensive participation by each member.

Is There Ever Association Standing?

If the association is seeking a declaration, injunction, or another form of prospective equitable relief, then it can be reasonably supposed that the all members would benefit and the concerns regarding efficiency would be advanced. However, the courts will still look at whether individualized evidence must be presented or if the evidence will be redundant. They will also examine whether concerns of judicial economy will truly benefit.

No problem; I’ll be Their Agent.

BRIA claimed that power of attorney status was granted to it by each member via a claims management agreement. But BRIA could not present authority that a power of attorney from each member exempted it from the third prong of the test.

Takeaways

Don’t give your money to strangers with big, unvetted promises.

Use Google, or an investigator, before investing. Too ofen we’ve represented jilted investors who could have learned to avoid their scammers with even minimal investigation.

Here’s what Big Momma Thornton thought about scammers.

Co-author Tara Trout Flume

You won’t get what you don’t ask for. That’s a given. But so is, You can’t always get what you want. That’s the end of most lawsuits for one side or the other. 

Take Wade Oil & Gas, Inc. v. Telesis Operating Company, Inc., et al, for example. Wade, an oil and gas properties broker, entered into a contract with Telesis in which Wade was granted “the exclusive right to solicit and seek offers” to purchase a property for three months in return for a sum of money and an overriding royalty interest. Telesis received an offer from the buyer during the three-month term, sold the property to the buyer with little to no involvement from Wade, and did not assign the override to Wade. Wade sued, arguing that it was owed the override because the offer was received during the exclusive listing period.

Unfortunately for Wade, the contract didn’t say what Wade thought it said (or at least, what he wanted it to say). The agreement read as follows:

“If any offers are received to purchase the Property by Telesis Operating Co., Inc. within 180 days after the [3 month term] that were identified by Wade to Telesis [. . . ] during the [ 3 month term] and a sale is consummated, then Telesis [. . . ] shall be obligated to compensate Wade”

Because Wade did not ‘identify’ the buyer to Telesis, Telesis was not obligated to compensate him with the override. Wade argued that he had an exclusive right to sell the property during the term, but he did not. Instead of Wade obtaining an exclusive right to receive offers and sell, Telesis “reserved its right to sell the property independent of Wade.”

Wade lost out on a large sum of money because his contract didn’t say what he intended it to say; instead it created ambiguity.

It might seem silly to reiterate so frequently the notion that your contract needs to clearly state what you want and expect to come from the agreement and the relationship, this case reminds us that contracts don’t always get written that way.

The takeaway: Negotiate for what you want and then verify that your agreement explicitly states what you intend. Ambiguity works pretty well for presidents and members of Congress, and in some religions (think Episcopalian, but not Baptist) 

The obvious musical interlude. I know its only a rock and roll cliche, but I like it. 

Co-author Alexandra A. Crawley

In Walton v. City of Midland, the surface owner of a 35 acre tract within the city limits of Midland, Texas, contended that a provision in a city permit for an oil or gas well was a regulatory taking because it required the lessee to drill a water well on the surface owner’s property for landscaping purposes and that this requirement exceeded the lessee’s right to use water under its oil and gas lease.

The city granted the lessee a permit to drill a well for oil or gas on the surface owner’s property with the following requirement:

Operator shall drill one (1) freshwater well for the provision of irrigation water to maintain the trees required above. Said water well shall not be closer than five hundred (500) feet to the permitted oil and gas well. Operator shall maintain all required trees in a healthy and growing condition. The operator is authorized to drill only one well for irrigation purposes.

The Elements of a Taking Claim

The elements of an inverse condemnation claim are (1) the governmental entity intentionally performed an act in the exercise of its lawful authority, (2) that resulted in the taking, damaging, or destruction of the claimant’s property, (3) for public use. Such a claim may be based on a physical or regulatory taking. Walton alleged a regulatory taking.  (It is referred to as “inverse” bcause it is the opposite of the typical eminent  domain case, in which the government is the claimant.)

The Reasoning

The court determined there was no regulatory taking, focusing on the various tests applied by the United States Supreme Court that aim to identify regulatory actions that are functionally equivalent to the classic taking in which government directly appropriates private property or ousts the owner from his domain. The tests focus on the severity of the burden that government imposes upon private property rights. Several facts support th result in this case:

  • The provision did not require lessee to drill the well on the surface owner’s property, only that it could not be located closer than 500 feet to the permitted oil and gas well; therefore, the surface owner did not “suffer a permanent physical invasion of his property.”
  • Because the surface owner acquired the property subject to the mineral severance, granting the permit was consistent “with the parties’ already existing property rights” and no affirmative rights were granted to the lessee “to occupy or use” the land.
  • The value of the surface after the lessee drilled the well was $3,000 per acre, which shows “the granting of the permit did not deprive him of all economically beneficial use of the property to the extent that he was only left with a token interest.”

Takeaway

If the government is not specifically granting authority to occupy or use land, or taking away all but a token interest in private property, a regulatory taking action will most likely not succeed in Texas.

Co-author Alexandra Crawley

Oh, how a simple Favored-Nations clause in an oil and gas lease can get complicated, with large financial consequences! In BP America Production Company v. Zaffirini, BP paid Solis a $1,300 per acre bonus for a lease covering 30% of the mineral estate and agreed that if paid a more favorable bonus or royalty term with any other co-owner in the same mineral estate, BP would pay lessor Solis according to the more favorable terms.

BP later obtained the Zaffirini lease covering the remaining 70% of the mineral estate and paid $1,750 per acre for a paid-up bonus and for lessor’s consent for BP to assign to a third party. Also, if BP’s title examination later revealed a greater number of net mineral acres, then BP would pay the difference on the basis of $1,300 and $450 per net mineral acre (for a total of $1,750). The Zaffirini lease included the same Favored-Nations clause.

 Upon executing the Zaffirini lease, BP paid the $450 per acre difference to Solis (the $1,750 bonus in the Zaffirini lease minus the $1,300 bonus in the Solis lease). After BP paid Solis, Zaffirini demanded that BP pay another $450 per acre as bonus under her Favored-Nations clause, claiming their bonus was only $1,300 per acre and that the additional $450 was a consent-to-assign fee, separate and distinct from the bonus. Zaffirini stated the “plain language of the lease expressly called for such segregation.”

The trial court agreed with Zaffirini, awarded over $2 million in damages and $600,000 in attorney’s fees to Zaffirini, and declared that the disputed $450 per acre was not bonus and even so, Solis was entitled to retain the additional payment to her.

The appellate court reversed. The Zaffirini lease was unambiguous and the parties’ intent, expressed in the lease, was that the bonus was to be $1,750 per acre. A determining factor was the prior negotiations of the parties, wherein BP specifically rejected several proposals from Zaffirini requesting a paid up bonus of $1,300 per acre and $450 per acre for lessor’s consent-to-assign. 

 Takeaways:

  • Perhaps this dispute could have been avoided had someone taken a little more time to examine their documents before signing. Scriveners, here is a way to do that: Write the language, put the document away for a day or so, get back to it while keeping in mind the purpose of the provision. Is it still as clear as it was the first time? If not, fix it.
  • For provisions in a lease, or any contract for that matter, which could be subject to more than one interpretation, specifically define meanings and implications in the document itself.
  • As we often see in lease disputes, home town justice prevailed at the trial court, to be corrected on appeal.
  • Each side argued the agreement was unambiguous and should be decided in their favor. Unless the court was going to award a trophy to everebody for showing up, that just can’t be.

Co-author Andrew Neal

Non-operators have had a lot in common with Br’er Rabbit ever since 2006, when the Texas Supreme Court surprised the industry in Seagull Energy E & P, Inc. v. Eland Energy, Inc. Their tar baby is the ruling that, absent a release from the operator a working interest under a JOA who assigns his interest to a third party remains automatically liable for costs not paid by his successor. Indian Oil Company, LLC v. Bishop Petroleum, Inc. is a step to clarify the extent of the automatic liability prescribed in Seagull.

Bishop, operator and working interest owner, and Trotter, non-operating working interest owner, signed a 1989 Model Form 610 JOA. Trotter assigned his interest to Indian Oil in 2002 and informed Bishop about the assignment. In 2007 the well ceased to produce. Indian Oil and the other working owners approved an AFE for a workover costing $1.6 million to restore production. The workover was unsuccessful and the well was plugged at a cost of $243,300. When Indian Oil refused to pay, Bishop sued Trotter claiming under Seagull that he was automatically liable for all costs not paid by Indian Oil.

The 1989 model form states, “[N]o assignment or other disposition of interest by a party shall relieve such party of obligations previously incurred by such party.” Trotter was held liable for costs which he “previously incurred” prior to assigning his interest in the well to Indian Oil in 2002, such as his pro rata share of P&A costs, but not for costs of reworking operations approved by Indian Oil and not by Trotter. In other words, under the 1989 model form, a working interest owner will not be held liable for expenses which he did not agree to pay.

Indian Oil isn’t a roadmap for all disputes over the automatic liability prescribed in Seagull, but it does establish some relief for former working interest owners. 

Takeaways

  •  Working interest owners who assign their interests continue to be automatically liable for unpaid costs that they agreed to pay.
  • Texas courts appear to be reluctant to force working interest owners who sold theirinterests to pay for costs approved after they sell their interest in the well.

Maybe now this plea from a former owner won’t be so desperate.

There is a “Rorschach” way to examine your thinking about the controversy over fossil fuels and global warming. 

Psychologists use the Rorschach test to examine a person’s personality characteristics and emotional functioning. It’s been employed to detect  underlying thought disorder, especially disorganized thinking as evidenced by disorganized speech.  Try this on yourself.

Here is a photograph (from an English artist flying over Leon County, Texas, as reported in The Guardian).

Tell me what you see: The highest and best use of this land, … happy royalty owners and economic prosperity, … a nudge toward independence from people who want to kill us, … a step to a cleaner environment? 

Or: Stark and relentless environmental devastation, … a preview of the ghastly future of fossil fuels, … fracking, … the invisible hand of Dick Chaney and the Koch brothers?

If you are in the first category, you would probably agree with this, from the Associated Press, on the environmental costs of ethanol, or this, about  the good news of increased use of recycled water in fracking.

If not, then you would likely gravitate toward this one from the Los Angeles Times on the perils of climate change. (The same L A Times who refuses to publish letters to the editor questioning global warming.)

Or Al Gore’s Wall Street Journal warning about the inevitable and fast approaching carbon asset bubble.

Incidentally, I’ve confirmed what I suspected. Wells in the picture were drilled mostly in the 70’s and 80’s.  Modern fields tend to appear nothing like this because of the ability, with horizontal drilling, to drill a number of wells from a single pad, thereby reducing the drilling footprint.    

A musical interlude that best combines confused thinking and good piano playing.

Co-author Brooke Sizer

Vestiges of the early Haynesville Shale land rush remain.

Imagine: The lease is about to expire. Lessee (Mecom) offers lessor (Henderson) $90 per acre for an extension, telling him, “I could extend for two more years without consent so I’m giving you free money.” He explains his intention to drill more Cotton Valley wells on the Bossier Parish property. Henderson agrees to the $90, plus a royalty increase to 20%. Two months later Mecom sells the lease and other acreage to Petrohawk for $6,750 per acre.

Mecom’s work isn’t done. He couldn’t assign the lease without Henderson’s permission. After his sale Mecom flies to Shreveport to meet with Henderson and explains that the assignment was “just a chance to make money”, and offers to pay off his mortgage on the ranch, which he does. Henderson sues.

No misrepresentation – read your lease

In Henderson v. Windrush Operating Co., LLC, et al, Henderson claimed that the defendants (Mecom and the original lessee, Gaylord) deceived him about the terms of the lease and about their development intentions. But,

“A party who signs a written instrument is presumed to know its contents and cannot avoid its obligations by contending that he did not read it, that he did not understand it or that the other party failed to explain it to him.”

At trial Henderson was shown the continuous operations provision and agreed that the language “seems to say” that operations could extend the lease beyond its primary term.

The lease language supported Mecom’s statement that the lease could be extended. While the exact nature of the extension wasn’t disclosed during the discussion, a lessor is responsible for knowing what his lease says, said the court.

The court didn’t buy the trial court’s finding of an “ulterior motive” supporting Henderson’s claim that he was lied to about Mecom’s future intentions, citing the abrupt spike in land prices after the extension was negotiated.

No relation of confidence – I’m not the friend you thought I was

A ”relation of confidence” exists in Louisiana where there is a longstanding and close relationship between the parties due to numerous transactions. Courts have found this relationship in a family relationship, a 25-year long business relationship, and between spouses. Henderson only met Gaylord in 2005 and Mecom in 2007. The court concluded that the relationship here was not extensive and was limited to intermittent social and business interactions.

That Henderson assisted Mecom in obtaining leases from Henderson’s neighbors, Mecom gave Henderson a $10,000 Christmas present because “it was the right thing to do”, and they discussed going into the saltwater disposal business together, wasn’t enough to convince the court.

Takeaways

Lessee: In a fraud suit brought by the former local police chief, don’t expect to win at trial.

Lessor: Read your lease! Don’t rely on the unctuous words from your “friend”, the silky-smooth lessee.

Bonus observation: Congrats to Mecom III, who in this case and his Petrohawk deal fared better than any of his daddy’s Saints teams ever did.