Even if you aren’t the actual plaintiff in a lawsuit you can still be personally liable for breach of a covenant not to sue. It’s easy! Sign a release in your individual capacity, cause an entity you control to bring a lawsuit, and then financially support the suit. And you can share the liability with your friends who signed with you!  That’s the takeaway in Dallas Gas Partners, LP, et al v. Prospect Energy Corporation.

Muse, Nelson and others formed Dallas Gas Partners, LP (DGP), which got into a feud with Prospect Energy over an agreement to finance the purchase of Gas Solutions. In a transaction to resolve the dispute, the parties executed three documents:

  • DGP’s limited partners signed a “Unanimous Written Consent of the Partners,” approving assignment of the contract to purchase Gas Solutions.
  • Muse, Nelson, Weiss, and Prospect signed a “LLC Membership Interest Purchase Agreement” which included a “Mutual Release” by which each signatory agreed to release all claims arising out of the agreement, and a covenant not to “institute, maintain, or prosecute any action, claim, suit, proceeding or cause of action” relating to the agreement. The agreement provided for recovery of “actual damages”.
  • The DGP partners also signed a “Consent and Agreement of Limited Partners”, by which they consented to the assignment of the right to purchase Gas Solutions and the transfer of the membership interests to Prospect. Each limited partner ratified the Mutual Release.

DGP sued Prospect alleging many bad deeds. Prospect counterclaimed and sued DGP, its general partner, Muse, Nelson, and Weiss for breach of the covenant not to sue.

Prospect prevailed. The court found that Muse, Nelson, and Weiss signed the LLC Purchase Agreement in their individual capacities and were therefore bound by the Mutual Release. Muse, Nelson, and Weiss received “‘significant consideration” in the transaction. There was “uncontroverted evidence” that Muse, Nelson, and Weiss caused and funded the filing of both lawsuits.”

Muse and Nelson argued that, even assuming they were bound personally by the LLC Membership Interest Purchase Agreement, there was no breach because they didn’t personally sue Prospect; DGP did.

But in that agreement the three individuals transferred their individual interests to Prospect. And they signed the Consent and Agreement of Limited Partners as partners.

Focusing on the phrase “institute, maintain or prosecute any action, claim, suit . . . to enforce any of” the released claims the court decided that even though they weren’t the actual plaintiff, the individuals caused the suit to be filed, prosecuted it, and funded it.

The word ‘maintain,’ must be given meaning, the court said, relying on the definition from Merriam-Webster: “to support or provide for.” Based on this definition, Muse and Nelson, as signatories of the agreement, could “maintain”’ a lawsuit by providing financial support. Muse and Nelson violated the mutual release and covenant not to sue by personally funding the suit.

Prospect’s only damages were its attorneys’ fees, which the court awarded as “actual damages”.

Lou Reed RIP. (Ignore the graphics; the song is great)

As another college football weekend approaches, let’s talk whiskey.  All work and no play might save Jack’s liver from decaying into a bile-filled mass of diseased tissue, but the oil man needs a break from the burden of termination clauses, stolen trade secrets, and – as revealed by Yoko and Shawn – desecration of Mother Earth by those toxic gas wells he’s been drilling.

Cheer up, Jack! I’ve reported before on my search. (Perhaps you took the quiz?) Round two is really the neo-Sazerac, and our candidates, all in Dallas, tweak the traditional ingredients to great and tasty effect.

Princi Italia

Alternative ingredient: Black Sambuca instead of Absinthe. It’s lower in alcohol and hence more subtle and smooth than Pernod or Absinthe, with less of an alcoholic jolt. They’ll do it with Woodward Reserve Bourbon if you like. Don’t take them up on the offer – too sweet IMO. Aaron Neville and Linda Ronstadt in a glass.

Hibiscus

Alternative ingredients: Where do I start? Grant, the very excellent mixologist, uses Whistle Pig, a 100 proof rye, and Bitter Truth Aromatic Bitters, 80 proof (higher in alcohol than Pernod or Absinthe). The absinthe is misted, rather than rinsed around the inside of the glass. Very cool. The bitters lingers for an aftertaste that’s as soothing as Eric Clapton channeling Elmore James.

A nice, not harsh, alcohol bite. Talking Heads in a glass.

Bonus drink that has no name: Five 50-proof or less Italian Amaro herbal liqueurs, the names of which I don’t know, with a spritz of something called Bittermen’s orange cream citrate, and who-knows-what-else. It’s an aromatic drink that is complex and … I have no idea … Exotic and incomprehensible? King Sunny Ade in a glass.

The Standard Pour

“Neo” in that they mist the absinthe in the glass and then flame it, giving it a kind of caramelized flavor. A tiny bit too much simple syrup IMO.

The Meters in a glass, with a Barrence Whitfield and the Savages chaser.

Enjoy!

The fellow on the right is after your lease. The result in Cabot Oil & Gas Corporation v. Healey, LP was so bad for the lessee I’m going directly to …

The Takeaways

Landmen: First, when offered a lease with automatic termination language, run away like you’re chased by an Obamacare Navigator who hasn’t undergone a background check, especially when termination is triggered by something as immaterial as failing to share data. I don’t care how much your geologist says that’s where all the hydrocarbons are. 

Second, for all those times you will ignore the first suggestion, redouble your lease administration processes so that burdensome and out-of-the-ordinary lease requirements are not overlooked. I have litigated these provisions.  Protecting your assets from a catastrophe is a matter of having both good processes and good people.

Landowners: If you are in the middle of the play, especially if you have big acreage, see “Second”.  Used in good faith, data-sharing, automatic termination and similar clauses protect you from operators who might otherwise ignore legitimate concerns. 

The Lease

Three oil and gas leases required the lessee to deliver to the lessor daily drilling reports, copies of all logs, monthly production reports for the life of the well, copies of all reports and forms filed with the Railroad Commission, locations, dates of completion and abandonment, and copies of title opinions.

Any breach of the lease “ … shall be grounds for cancellation of this lease …”.

The Lawsuit

Cabot and its predecessor, Enduring Resources, drilled 21 wells without providing all the required information. Healey contacted Cabot, suggested that the leases had been breached, and requested to be treated as a working interest owner. In response, Cabot provided a “sizable amount” of data in accordance with the data-sharing provision.

Healey sought a declaratory judgment that the leases had terminated, that Healey was an unleased co-tenant in the wells, and for an accounting. The jury found that Healey had effectively terminated the lease due to Cabot’s breach. The court signed a judgment declaring that the leases were terminated, the amount of production expense for each well, and determining Healy’s ownership percentage in each of the units and awarded Healey attorney fees.

If you don’t go to trial for a living, you may stop reading now

A declaratory-judgment action is not the proper procedural vehicle for determining whether the lease had been terminated, and the court so ruled. The proper procedure is trespass-to-try-title. But Cabot didn’t preserve the error because it had not filed special exceptions to Healey’s petition.

What you say in a hearing months before trial can haunt you. At a continuance hearing Cabot said it needed to conduct discovery from Enduring on the reasonable and necessary expenses for the wells. Months later, at a limine hearing, the lawyers explained that they had been told to “take a hike”, and didn’t try harder (letters rogatory, depo notices, etc). Thus, there was no evidence of those expenses.

The court discussed Rule 1006 (summaries of voluminous records) and Rule 803(6) (the business records exception to hearsay).

Challenges to the jury questions on substantial compliance, waiver, and quasi-estoppel are worth a look.

Co-author Travis Booher

How is a producer to deal with a demanding and formidable lessor’s insistence on stringent surface protection? How about demands from environmental groups and government entities? One way might be to educate himself and his fellow stakeholders.

One group at the forefront of education efforts is Texas A&M University-Kingsville’s Caesar Kleberg Wildlife Research Institute . The Institute promotes voluntary conservation practices in oil and gas development.  Specifically, it provides information to producers about native grass reseeding efforts. Texas Parks and Wildlife  also provides wildlife-friendly education materials.

Why is this important? Historically, “South Texas” meant brush country, big deer, quail, and late-night border town revelry. I was in south Texas last week, marveling at the development arising from Eagle Ford Shale oil production. Today, “South Texas” is as much about oil derricks, over-travelled roads, “no vacancy” signs, and savvy lessors with significant mineral interests presenting sophisticated and demanding lease provisions (we’re talking about surface use; let’s not even mention royalty and pooling clauses).

Larger rural tracts resulting in greater bargaining power for the mineral owner drive more stringent requirements for surface reclamation. Landowners devote significant effort and attention to their surface. In addition to addressing locations and damages for roads, pads, pits and pipelines, leases often also require reseeding and planting of grasses after production is obtained. Drilling closer to populated areas drives the same interest by governments and environmental groups. (To our knowledge this isn’t prevalent in the Eagle Ford but is an issue elsewhere.)

There is another reason: South Texas is a significant wildlife habitat, and landowners and environmental groups hoping to support the environment, while also enjoying the economic rewards of mineral development, request reseeding with native grasses. To the landowner it’s easy – native grasses encourage vibrant wildlife and support wildlife habitat. It’s not quite “Keep Austin Weird”; it’s more like “Keep South Texas Native”. Satisfying these requirements can be burdensome and costly, and requires knowledge and effort, but it can be good for producers, landowners, hunters, environmentalists and nature lovers in general.

The Big Picture

Landowner and community happiness can often be found in creative surface-use protections. Not coincidentally, producers’ frustrations often lie in the same spot.  Reseeding with native grasses and similar efforts can turn the producer’s frustration into happiness – at least until the royalty and continuous operations clauses kick in.

For another article on this subject, see the July/August 2013 AAPL Landman magazine.

By Jim Reed and David Leonard

The Fifth Circuit has taken steps to fine-tune the interpretation and implementation of the agreement BP negotiated to settle its massive liabilities arising from the April 2010 oil spill following the explosion of the Deepwater Horizon. Interpretation of the 1,000- plus-page settlement agreement—which the court described as one of the “largest and most novel class actions in American history”—has led to several disputes between BP and the plaintiffs’ class counsel. This recent activity should not impact the ability of businesses that employ accrual accounting systems to recover qualified business economic losses under the settlement agreement.

The Issue

Business economic loss claimants must satisfy a complex causation standard established by the settlement agreement in order to recover economic losses. Determining whether a business passes causation requires an analysis of financial performance before and after the April 2010 spill. The financial data required for this causation analysis will rely on different accounting assumptions depending on which accounting system a business employs.

BP has taken specific issue with the treatment of claims submitted by businesses that employ cash (as opposed to accrual) accounting systems. BP argues that financial data generated by cash accounting systems may generate inflated business economic loss awards. BP therefore sought to enjoin the Settlement Administrator from paying business economic loss claims in order to give the court a chance to address these concerns regarding the interpretation and implementation of the settlement agreement with regards to cash accounting systems.

The Solution

Responding to BP’s concerns, the Fifth Circuit ordered the federal district court to ensure the Claims Administrator “is not applying the cash-in, cash-out interpretation to claims that are presented with matched revenues and expenses.” The Fifth Circuit also directed the federal district court to “expeditiously craft a narrowly-tailored injunction that allows the time necessary for deliberate reconsideration of these significant issues on remand.”

To this end, last Friday the federal district court in New Orleans targeted claimants employing cash accounting systems.  The court  ordered the Claims Administrator to immediately suspend payments with respect to those business economic loss claims in which the Claims Administrator determines that the matching of revenues and expenses is an issue. Although this order may jeopardize the ability of businesses employing cash accounting systems to recover under the settlement agreement, it should not endanger the viability of claims supported by accrual accounting systems.

Consider this while celebrating the resurrection of Big Tex: When a lease prohibits post-production cost deductions, can a lessee deduct those costs from a lessor’s royalty? Yes, says Potts v. Chesapeake Exploration, L.L.C. In a market value lease, where lessee sells the gas “at the well” and the court applies the netback approach to calculating market value, the lessee is entitled to deduct post-production costs incurred after the point of sale.

That might make more sense when you know the facts. 

The lease had a “no deduct” provision:

Royalties on gas were ” … the market value at the point of sale of 1/4 of the gas so sold or used. … , [a]ll royalty paid to Lessor shall be free of all costs and expenses related to the exploration, production and marketing of oil and gas production from the lease including, but not limited to, costs of compression, dehydration, treatment and transportation.”

Chesapeake sold the gas “at the well”, and deducted no expenses attributable to Potts’ royalty payments from the time the gas was produced at the well until its first sale. To arrive at the value of the gas at this point Chesapeake took the value of the downstream market-based sale and subtracted costs and expenses incurred between the point of sale and the downstream resale point.

Potts contended that Chesapeake breached the express provisions of the no-deduct clause.

The difference in the parties’ positions arose out of how post-production marketing costs are treated in the calculation. Potts contended that Chesapeake deducted post-production costs to calculate the royalty. Chesapeake, on the other hand, contended that when applying the netback approach, post-production costs may be used to determine the market value of the gas.

The “point of sale” is the point where there is a transfer of title in an arms-length transaction in exchange for compensation.  Potts contended that “point of sale” must be read together with the no-deduct language to ascertain its meaning and when doing so, point of sale means the point where the gas is ultimately sold off of the premises. The court didn’t agree.

According to the court, ” … the netback method requires ascertaining the market value of the gas where available downstream and then subtracting reasonable post-production costs from that point to the point where it is agreed to calculate the market value for royalty purposes. In this case it was the point of sale.

The court distinguished Heritage Resources v. NationsBank, even though the royalty clauses were similar. The factual difference was that the sale in Heritage took place off-premises. Had the royalty in Heritage been calculated at the off-premises point of sale, the no-deduct clause would have prevented deducting post-production costs incurred from the point of production at the well to the point of the off-premises sale.

In this case, the sale was at the well. Therefore, the no deduct provision is consistent with Heritage.

Takeaways – the best-laid plans … 

Potts said their argument had to be correct because they wrote the no-deduct provision to comply with Heritage. But what they didn’t, and perhaps couldn’t, count on was the way Chesapeake sold its gas. Did Chesapeake plan it this way?. That seems unlikely, because at one point prior to litigation it agreed that it couldn’t deduct post-production costs.

Chesapeake’s sale was to an affiliate, about which Potts didn’t  complain. With 20-20 hindsight, maybe he should have.

The court told Potts to give it up or turn it loose (their claim, that is), but not quite in this way.

Co-author Brooke Sizer

The “tradition” of stealing a prospect generator’s maps – and getting caught at it – is alive and well. Lamont et al v. Vaquillas Energy Lopeno Ltd et al is the second recent Texas case on theft of trade secrets and, like the first, resulted in a large judgment against the alleged thieves.

The Players

Ricochet, owned by Hamblin and Lamont, entered into Prospect Generation Agreements with Vaquillas and JOB.

In September 2004, Ricochet’s geologist Maier identified the Lopeno Prospect beneath two contiguous tracts — Worley and El Milagro. Maier created a seismic map of the prospect that became known among the parties as the “Treasure Map”. Vaquillas and JOB agreed to participate as working-interest owners. Ricochet obtained a lease over the Worley property but not El Milagro because it was in litigation over a previous lease. The meetings among Ricochet, Vaquillas and JOB were considered by everyone to be confidential, and the seismic information was to be kept secret.

In August 2006, Lamont notified Hamblin that he wished to separate from Ricochet. In February 2007, agreements dividing Ricochet’s oil and gas prospects and a separating Lamont from Ricochet were signed, and Lamont tendered his resignation as director, officer and chief operating officer, all retroactive to December 31, 2006. Lamont signed a Joint Operating Agreement for the Lopeno Prospect as a 29% working-interest owner. Thereafter Maier sent Lamont a copy of the Treasure Map without requiring him to sign a confidentiality agreement.  The parties drilled the Worley well.

In January 2007 Lamont met Carranco and in February provided Carranco with seismic maps of four different prospects, including Lopeno. In February, Lamont received a copy of the Worley well log and he and Carranco immediately began efforts to lease the El Milagro property under the name of Montecristo. In March, Lamont informed Ricochet that Crazy Horse, a company of Carranco’s, had purchased 10% of Lamont’s 29% working-interest.

Lamont and Carranco, using Montecristo, were successful in leasing the El Milagro property by outbidding Ricochet. They paid a bonus of over $1 million. During the next six months, L.O.G. drilled a well on El Milagro and depleted the Lopeno Prospect reservoir, thereby depriving Vaquillas of the ability to produce from the Worley.

The Incriminating Evidence

Lamont and Carranco did not conduct any independent research of the gas reservoir. It was only after viewing the seismic data and the well log that Lamont and Carranco sought to lease the El Milagro property. Also, in order to secure a bank loan to pay the lease bonus, Lamont submitted a letter containing information that was drawn directly from the seismic data and Treasure Map. Lamont and Carranco claimed the well-log led them to pursue the El Milagro property; however, the log only provided information regarding the Worley well, and Lamont and Carranco began drilling the El Milagro without attempting to obtain any seismic data on that property.

The Questions for the Court

Did the Treasure Map lose its trade secret status in light of Ricochet’s failure to require confidentiality agreements and by showing the map to potential investors? Lamont claims that he owed no duty to Ricochet after the effective date of his resignation.

No. The map did not lose its status as a trade secret. In Texas, employees are forbidden from using trade secrets acquired during employment, and this obligation survives termination. Furthermore, disclosure of a trade secret is not destroyed by limited communication and furtherance of the owner’s economic interests, such as showing protected items to prospective buyers or customers.

Were Lamont and Carranco liable for using a trade secret if the trade secret was discovered by “improper means”?

Yes. Obtaining knowledge of a trade secret without spending time and resources to discover it independently is improper unless the secret is voluntarily disclosed or reasonable precautions to ensure its secrecy are not taken.

 

Before we talk about global warming, which of these statements most matches your view of  politics and policy:

“In all things the mean is praiseworthy, and the extremes neither praiseworthy nor right, but worthy of blame.” Aristotle.

“There’s Nothing in the Middle of the Road but Yellow Stripes and Dead Armadillos.” Title of a book  by Texas populist and former Land Commissioner Jim Hightower.

 Mr. Hightower would be right at home in the latest clusterfukushima that is the disagreement over global warming. The Intergovernmental Panel on Climate Change – the UN sponsored organization that has been reporting for years on the impending doom caused by anthropogenic global warming – is about to issue its fifth report on climate change. The report will reveal (it seems everybody but you and me has read it) that the IPCC has been underestimating global warming for all these years, and climate change could have double the impact previously thought. That’s what Nafeez Ahmed in EarthInsight says.

That’s not at all what the report will say. The IPCC will tone down its climate-change alarmism and substantially reduce its dire predictions about the future rising of global temperatures. So there’s not so much to worry about. That’s what they say in The Spectator.

That’s a lie like all the other lies. The climate change deniers are “industry puppets spewing obscene lies while people drown”. And the recent Colorado floods are all because of climate change.  That’s what David Sirota says, rather emotionallly, in Salon.

That’s slanderous. The “tell” of the “climateers” reflects their bad hand.  Their warnings of catastrophe now say it will happen “some decades from now” rather than “before the Texas Rangers fall totally out of contention for the MLB playoffs”, as was projected. That’s what Powerline says. That deadline was mine, of course. Theirs is “soon”.  

B*#$+ S#*<!  Global warming is every bit as bad as it ever was and anyone who is against it has been writing articles characterized by misinformation. (To wit, a purportedly “humiliating” piece in The Daily Mail). That’s what Bob Ward of the Grantham Institute, associated with the London School of Economics, says.

And to pile on:  Rush Limbaugh is a corpulent, bloviating idiot. So thinks Media Matters.

Talk about bad motives!  The IPCC bureaucrats are all in it for the huge government subsidies and other perks, says Powerline. The NIPCC , a cleverly-named private group, uses its own studies to portray a view of climate change that is “realistic”. 

But NIPCC is a front for former tobacco lobbyists and current fossil-fuel industry stooges, and their conclusions are “absurd”, says desmog.

Trust me; there’s more.  I give up trying to please Aristotle; I’m in the hunt for Diogenes, the guycarrying the lamp.

Lawyers and landmen are taught that a document affecting real or immovable property not recorded in the public records means nothing to a stranger. Like O. J.’s quest for the real killer, lower premiums after the Patient Protection and Affordable Care Act, and the present I would have given my wife except I forgot our anniversary, treat it like it never happened. Freeman v. Block “T” Operating LLC tells us – too late to save our healthcare system and the sanctity of my wedding vows – that’s not always the case.

The Facts

Kurios assigned 2.5% of 8/8ths overrides in wells in Acadia and Jefferson Davis Parishes (the percentage was different on one well but that doesn’t matter here). The assignments were not recorded. Kurios then conveyed to Block T a 20% working interest and a 14% NRI. These assignments were recorded.

After Block “T” acquired and recorded its interests, the plaintiffs-override owners recorded their assignments. Block “T” assumed operations and payment of proceeds from production, and the plaintiffs demanded payment.

Plaintiffs then sued Block T, operator and partial working interest owner, for payment. Block T asserted the public records doctrine (codified in Louisiana Civil Code Art. 3338) as a defense. According to the court, the public records doctrine did not apply.

The Rationale

The gist of the ruling is that “The recorded documents indicate that the net revenue interest owners received only a portion of the leasehold interest of each well. The retained leasehold, the assignments demonstrate, was sufficient so as to create the overriding royalty interest in the percentages claimed by the plaintiffs.”

The plaintiffs’ position was that the working interest assignment to Block “T” and others was based on a portion of the overall NRI, and that adding the landowners royalty and the working interest assignments together would demonstrate that Kurios retained a sufficient leasehold interest that permitted it to convey the override to the plaintiffs. This, the court said, was apparent on the public record.

The court found that Block “T”, as the operator of the wells and the party responsible for properly distributing revenues from the properties, was the appropriate party to be cast in judgment for payment of the overrides.

It’s not as Weird as You First Imagine

At first blush, this is perplexing because it appears that Block T, upon receiving a leasehold assignment, was required to “do the math” to figure out who to pay and how much to pay them. This is especially so in light of this comment in the opinion: “The primary focus of the public records doctrine is the protection of third persons against unrecorded interests”.  But focusing on the court’s approach reveals that Block T’s liability was as the operator charged with paying proceeds properly, and not as the recipient of an assignment without notice of existing overrides.

Here is the musical dilemma faced by Block T.  You gotta love the way Garth Hudson plays the organ.

There is more to learn from Southwestern Energy Production Co. v. Berry-Helfand and Muncey, discussed in a recent post.

Damages – With Room to Run, the Expert Scores.

Courts are entitled to be “flexible and imaginative” when determining damages for misappropriation. The methods could include value of the plaintiff’s lost profits, the defendant’s actual profits from the use of the trade secret, the value that a reasonably prudent investor would have paid for the trade secret, development costs that the defendants avoided, and a “reasonable royalty”.

This approach allows a plaintiff to recover even if she suffers no loss herself.

Ms. Helfand’s expert reservoir engineer calculated the present value of  the revenues Sepco could reasonably be expected to gain from its exploitation of the trade secret and determined the fraction of those revenues that should be apportioned to Helfand, using as a guide a Sepco prospect agreement for the same properties. That, he said, was Helfand’s damages. Helfand was also entitled to three percent of Sepco’s $355M sale of its deep rights, based on what she testified was her typical override on her prospects. He put her total damages at $45M. The jury, accepting some of his conclusions but not others, found the damages to be $11M. So  maybe it was a field goal.

Limitations – I Smell a Rat. When Must I Set the Trap?

Ms. Helfand had three years from when she discovered, or by the exercise of reasonable diligence, should have discovered the trade secret theft, to bring her suit. In May 2005 she expressed her fear in emails that her “concepts and I had spent years in developing are now being used by entitled parties.” Shortly thereafter, though, Sepco returned her materials and assured her it had retained nothing. It turns out, her intuition was correct.  She was aware later that Sepco had the opportunity to steal her data but relied upon Sepco’s assurances that it kept nothing. The jury (and appellate court) concluded that she had no objective reasonable basis for further inquiry into Sepco’s conduct until January 2009, when she actually discovered the misappropriation.

Disgorgement – When is it Available?

The court reversed a $23M award for disgorgement of profits on the basis that the equitable remedy is only for breach of a fiduciary duty. As discussed before, Sepco owed no such duty to Ms. Helfand.

Takeaways

• You might suspect you’ve been cheated, but until you have an objective basis for filing suit you can be protected by the discovery rule. The concept is simple, but you still have to convince the jury.

• Sepco made a wholehearted but unsuccessful challenge to the methodology, assumptions, inconsistencies and projections by Helfand’s expert. 

• Speaking of experts, looming over Ms Helfland’s  verdict and judgment like Jadeveon Clowney on third-and-long is a defendant’s BFF – the Texas Supreme Court. Among that court’s favorite targets are experts. Did he jump through every methodological, analytical, logical, scientific and peer-reviewed hoop necessary to satisfy the picky court?  You can see that the defendant focused on this.