Co-author Travis Booher.

All legislation is not good legislation. The good news is that some of it fails. Such is the case with H.B. 2590 passed by the 2013 Texas legislature but vetoed by the Governor. We mention it because it will be back in the next session.

The Bill, “An act relating to the foreclosure sale of property subject to an oil or gas lease”, addresses the age old problem of foreclosure of property subject to an oil and gas lease.

Any oil and gas lease acquired after a deed of trust is subordinate to the deed of trust. Title examiners require a subordination agreement from the lender in order to prevent termination of the lease in the event a foreclosure occurs. H.B. 2590 provided that an oil and gas lease on land that has been foreclosed would remain effective after the foreclosure sale ifthe lease was valid, and was:

  • executed and recorded in the real property records of the county before the security interest was recorded; or
  • executed and recorded in the real property records of the county after the security interest was recorded but before the foreclosure sale.

The Bill was drafted with urban drillers in mind, and would be useful where an urban unit includes thousands of home lots.

But there were hidden perils:

  • The Bill required the lessee to “indemnify the purchaser and any mortgagee of the foreclosed real property from actual damages resulting from the lessee’s operations conducted pursuant to the oil or gas lease”.
  • The Bill provided that foreclosure sale “terminates and extinguishes the lessee’s right to use the surface … “.

Supporters argued that if property is foreclosed and there is no subordination agreement the lease would be lost anyway! Correct, and as a result the Bill had great practical application.

Critics disagreed with increased indemnification liability, and were unsettled about the wording of the surface provision. (We call them “critics” and not “opponents” because the Bill was discovered by many industry insiders only after it had passed with no opposition. The sponsors denied any monkey business.)

The Bill created more questions than it answered. For instance, it was writen as if the surface owner always owns 100% of the minerals, and not only portion. This is uncommon in rural acreage. Also, the loss of surface rights could be contrary to the mineral estate’s dominance in tracts covered by more than one lease (where the foreclosure would be of less than 100% of the minerals).

In any event, the Bill died. Expect it to be re-introduced in the next session. If so, it will not escape scrutiny and may not have the opportunity to meet our new governor.

Comparative Title Analysis in Texas, North Dakota and Montana. Co-authored by Katie English and Taylor Lamb

The Title Question

Your title examiner often encounters a conveyance to an individual “as Trustee” with no Trust specified in the instrument. For example, the Mineral Deed conveys all right, title and interest in Blackacre to “Harold Smith, Trustee,” but the Mineral Deed does not identify the trust or disclose the names of the beneficiaries. These unidentified trusts are commonly referred to as “blind trusts,” and not all states treat these the same way.

Texas

In Texas an examiner “may presume the authority to convey, transfer or encumber the title to the property.” See Texas Mineral Title Standard 9.20. Thus, in Texas, if “Harold Smith, Trustee” appeared in a subsequent conveyance purporting to convey Blackacre to a third party, the examiner may treat this as an effective conveyance. If “Harold Smith, Trustee” never reappeared in the chain of title, record title of Blackacre would be held by “Harold Smith, Trustee.”

North Dakota

In North Dakota, identifications such as “‘trustee’ . . . without further identification of the beneficiary by name or the nature of the trust, are merely descriptive and the person is deemed to be acting in an individual capacity.” See North Dakota Title Standard 10-06. Thus, unlike in Texas, the Mineral Deed would not convey Blackacre to a blind trust with Harold Smith as Trustee. Instead, “Harold Smith” in his individual capacity would hold Blackacre.

However, because Standard 10-06 applies to both grantees and grantors, if “Harold Smith, Trustee” reappeared to convey Blackacre, the Examiner would be able to credit this second conveyance because the grantor’s “Trustee” title would be viewed as merely surplus. Thus, the result is the same here as it would be in Texas, although through different means.

Montana

In Montana any conveyance to an individual as “‘trustee’ . . . must be considered as though . . . the word ‘trustee’, or ‘as trustee’, or any equivalent fiduciary expression had not been used in connection with the grantee’s name.” See MCA 70-21-307. In other words, Montana follows the same approach as North Dakota.

The Takeaway

Instruments with identical language can have different meanings, depending on the state. If you are operating in a new state don’t assume the law there is the same as the law you are used to.

Co-author Bill Drabble

It must be maddening to non-lawyers that a large segment of an industry can operate in harmony by agreeing that a contract in widespread use means one thing, only to have party-crashers decide it means another. Total E & P U.S.A., Inc. v. Kerr-McGee Oil & Gas Corp. et al arose out of assignments of overriding royalty interests in an offshore Louisiana lease. The assignments had “calculate and pay” clauses stating that the assigned interest “shall be calculated and paid in the same manner and subject to the same conditions as the landowner’s royalty under the Lease.” The Outer Continental Shelf Deep Water Relief Act suspended the federal government’s royalty until 87.5 million BOE had been produced. Lessees Total and Statoil argued that the calculate and pay clauses also suspended payment of the overrides. The other working interest owner, Chevron, disagreed and paid on the overrides.

Reversing a district court ruling in favor of the lessees, the 5th Circuit said the assignment was, at the very least, ambiguous.

An overriding royalty is different from a lessor’s royalty.

The court relied upon the “well-recognized distinction between overriding royalty interests and a lessor’s royalty” under Louisiana law. According the court, an overriding royalty is in addition to the royalty paid to the landowner. Thus, the court disagreed with the trial court that the language had to explicitly state that the royalty suspension would not apply to the overrides.

Because the assignments did not explicitly state that the suspension of the federal government’s royalties counter-intuitively applied to the overrides, the contracts were ambiguous. Furthermore, the assignments stated the overrides shall be paid out of “all oil, gas, and casinghead gas … produced, saved, and marketed from the lease.” This broad language indicated that the royalty would be calculated based on total production, and not merely on the period in which the federal government was entitled to its royalty.

You go your way, I’ll go mine

The aspect of the case likely to frustrate the override owners the most was an expert’s survey, ignored by the trial court (but not by the appeals court because they took the time to mention it) that in 80 other overriding royalty instruments with language like the that at issue no other party interpreted the provisions so as to subject the overrides to the DWRRA royalty suspension.

A concurring opinion arrived at the same conclusion – the agreements were ambiguous – from another direction, relying on the structure of the calculate and pay clause to create the ambiguity. The meaning turned on what portion of the clause was modified by “in the same manner and subject to the same terms and conditions”.  If you want more grammar, I respectfully refer you to the opinion.

What next?

The case was remanded for a trial at which extrinsic evidence, perhaps including the report on the 80 similar agreements and Chevron’s position, will be admitted to determine the intent of the parties.

Most of the time, if you read Stroud et al v. Hosford et al. even Hamilton Burger might have won on these facts. But when a lease subject to an override is terminated and replaced by another, Texas cases usually end up against the overriding royalty owner.

The Holding:

The court agreed with the jury that the lessee intentionally terminated the lease to, in part, terminate the overrides. The question was whether that conduct is actionable under Texas law. The court reviewed Texas decisions on the subject and said that, even with what appeared to be bad faith, absent a relationship giving rise to a duty of good faith and fair dealing the override owners had no right to recover. The lessee doesn’t generally owe an implied contractual covenant or a fiduciary type duty to protect the interest of an override owner such as to require the lessee to make repairs to well equipment, perpetuate the lease, and ensure that overrides are not extinguished, and the lessee was not precluded by any contract from entering into a new lease.

The court acknowledged cases suggesting that a party that engages in conduct to intentionally wash out an override may be subject to liability. But the facts of this case did not support liability. The override owners have asked the Texas Supreme Court to review the decision. 

The (Simplified) Facts:

Do the facts get more “intentional” than these?

  • A few days after the lessee was notified that the ORRI owners didn’t have renewal and extension clauses, the well ceased to produce because of a mechanical defect (not caused by the lessee).
  • The lessee was advised by his lawyer that he had no obligation to pay the ORRI owners.
  • He knew he had a 90-day cessation of operations clause.
  • He didn’t order repairs on the well because, among other reasons, he had already offered interests in the property to other investors under other (new) leases.
  • There was no work during the 90 days and the lease terminated.
  • The lessee admitted that he intentionally returned the well to production after the lease had terminated and he had obtained a new lease.
  • He did it that way because he didn’t want overrides on the new lease.
  • The new lease was signed less than one month after the well ceased to produce and during the 90-day continuance operations period.
  • After the 90-day period expired, the lessee represented to potential investors that he intended to repair the broken well.
  • The well was repaired at a cost of $7,500 and production was resumed under the new lease.
  • The new lease and well were sold for $2.5 million.

The Dissent

The lone dissent appeared to be offended that such disregard for the rights of others could be rewarded.  Relying on lease provisions ignored by the majority and viewing some of the same cases differently, she would have reached a different result.  She also would have found that the lessee tortuously interfered with the override owners’ rights in the leases.

Where Do Override Owners Go Now? 

I’m sorry to say, it could be here.  

Thanks to Bill Drabble for his valuable assistance.

Noted scientists Yoko and Sean share their knowledge of fracking

Gasland II made its villainous debut this week on HBO.  It‘s more egregious than the first in that it not only repeats disproven scenarios, but adds new ones that are equally misinformed. I complain about these injustices as a hobby, so don’t take my word for it. Listen to someone who makes a living understanding and explaining these matters.      

Steve Everley of Energy in Depth reveals Gasland II‘s misstatements and exaggerations about Dimock, Pennsylvania; Dish, Texas; the Lipskys in Parker County, Texas; methane leaks and climate change; water quality in Pavillion, Wyoming (and the EPA’s testing malpractice); Deborah Rogers in Fort Worth; fracking and earthquakes; alleged well failures and casing leaks, and more.

To be fair to the many Americans who have formed a negative opinion about oil and gas exploration, movies like Gasland could be their only source of information on the subject. Those who haven’t heard the other side of the story can now be enlightened. Let them decide for themselves.

Many years ago, in the days of cheap oil and cheaper natural gas, The Superior Oil Company often hired geologists and engineers away from Mobil Oil. As a result of many years of attracting good talent, Superior became the largest independent producer in the U.S. In 1986 Mobil acquired Superior. It was said at the time that the only reason for the transaction was so that Mobil could get its maps back. Sounds like a joke, but it makes you wonder how often things like that go on in the oil business. I don’t know, but I’d bet the answer is, with electronic records and the thumb-drive, more than you would think.

I’ve written before on the importance of protecting trade secrets, and how miscreants who’ve been careless on their journey to perdition have paid the price. Now it will be more difficult for data thieves.       

The Texas legislature adopted the Uniform Trade Secrets Act, effective September 1, 2013.  I direct you to Tilting the Scales, a blog from Jamie Ribman and Cleve Clinton, two of  my Looper Reed colleagues who explain the changes in the law very well.

The good news is the opportunity for a musical interlude about treachery, one of  a trial lawyer’s favorite topics.   

 

We begin with a tribute to global warming of a different sort.

For those not yet overexposed to reports on President Obama’s climate change policy announcement, I offer this reasonably objective factual summary of the highlights from the Washington Post (rather than the platitudes underlying many reports). A link to the text of the President’s plan is embedded in the Post article.

Also here is a reasonably objective and factual commentary from Bjorn Lomborg and criticism from the Heritage Foundation (rather than the hysteria from some on that side of the debate).

A provision in a contract, no matter how unequivocal, does not always trump the law. The oil and gas lease allowed assignments, but no change or division in ownership of  the land or royalties would be binding on the lessee until the acquiring party had furnished lessee with the instruments constituting his chain of title from the original lessor. Jones v. Clem says that the lessee could not rely on that clause if the lessor’s change of ownership occurred prior to the lessee’s acquisition, even if no notice was given to the previous lessee. (The case is not new, but is worth your attention.)

The Purchaser’s “Mistake”

When new lessee Jones acquired the lease from original lessee Western, he relied on a document he referred to as a “division order” – an unsigned piece of paper from Western’s lease records indicating that the original lessor Smith owned a .125 royalty interest. That document is not a division order under the Texas Natural Resources Code (See §91.401 (3)).

The lessor – Smith’s predecessor – quitclaimed to Clem, who recorded the deed but did not notify the lessee, Western. Nevertheless, Western paid Clem until 1999 before ceasing payment. Jones acquired the lease from Western in 2002 and received the so-called “division order” showing the .125 royalty interest is Smith, so Jones began paying Smith. Clem testified that he thought the well had ceased to produce after 1999, but later learned that the well had been producing. Clem sued Jones and Smith for improperly-paid royalties.

“Constructive Notice” – Again

As the courts often remind royalty owners, the doctrine of constructive notice creates a harsh but irrebutable presumption of actual notice of matters in the public records. Jones was charged with constructive notice of Clem’s right to be paid royalties, and his reliance on the purported “division order” was misplaced. Constructive notice trumped the change-in-ownership clause.

Jones reminded the court that ordinarily, change-in-ownership clauses override the constructive notice doctrine. But Clem’s ownership through the quitclaim deed was a matter of public record when Jones acquired the lease. Clem was already in the chain of title and his ownership would have been easily discoverable by searching the county clerk’s records or obtaining a title opinion. Jones could not rely on failure of notice because the change occurred prior to the time Jones took over the lease.

The Takeaway – They Call it Due “Diligence” For a Reason

The urge to reduce pesky land and legal costs when acquiring a property is strong and understandable, especially when the well has been producing and royalties have been paid with no complaints. But there are limits to what you should rely on without conducting your own investigation. As the court saw it, Jones could have ordered a title opinion, or at least a landman’s examination of the public records. It isn’t clear why Jones didn’t notice in 2002, when he acquired the lease, that Western had not been paying Smith since 1999, but that should have been a warning.

At Looper Reed we advise our clients that it is good business to accommodate your neighbor informally, if you can. Sometimes that leads to attempted world domination, as Chamberlain learned from Hitler in 1938. Closer to home it is my college-age son using his bedroom floor as a summertime closet. It can also lead to litigation. This is how it was at the Texas Supreme Court in Merriman v. XTO Energy.

What is the accommodation doctrine?

If the mineral owner has only one method for developing and producing the minerals, that method may be used regardless of whether it precludes or substantially impairs an existing use of the serving surface estate. On the other hand, if the mineral owner has reasonable alternative uses, one of which permits the surface owner to continue to use the surface in the manner intended and one of which would preclude that use by the surface owner, the mineral owner must use the alternative that allows continued use of the surface by the surface owner.

What must the surface owner prove?

The surface owner must prove that (1) the lessee’s use completely precludes or substantially impairs the existing use; and (2) there is no reasonable alternative method available to the surface owner by which the existing use can be continued. If he carries that burden, then he must further prove that given the particular circumstances there are alternative, reasonable and customarily industry accepted methods available to the lessee which would allow both uses.

How did he do in this case?

Merriman owns a 40 acre tract with a home and a barn, permanent fencing, and corrals used in cattle operation. He leases several other tracts and once a year brings his cattle to the 40 acres for a round-up.

XTO was lessee of the severed mineral estate. Merriman claimed the proposed location would interfere with his cattle operation and that XTO failed to accommodate his existing use of the surface, exceeded its rights in the mineral estate, and trespassed.

This decision turned on some inside-baseball summary judgment evidence rules. It is best to leave your trial lawyers in charge of such details. The point is that Mr. Merriman did not produce evidence that he had no reasonable alternatives for his cattle operation. The good news was that a surface owner need not prove that he has no reasonable alternative for general agricultural purposes.

The court concluded that the well was an inconvenience to Mr. Merriman and would result in some amount of additional expense and reduced profitability. That hindrance does not rise to the level of evidence that the surface owner has no reasonable alternative method to maintain the existing use.

Is there an unspoken issue?

XTO’s lease was of the severed minerals. You can count on a surface owner who will never benefit from a well in his backyard to be a tougher customer than the royalty owner who stands to receive a fat monthly check for his troubles.

We offer Mr. Merriman our condolences and this musical tribute to his cattle operation. Or you might prefer this one.

Politico and other sources report that President Obama promised a crowd of supporters in northern California recently that he would unveil his climate change strategy sometime soon. What it might look like is unknown.  It has been suggested that the policy will revolve around EPA pollution sources like power plants. 

It is reported that there is no relation between the Keystone and climate change initiatives. The State Department concluded that the Keystone XL pipeline which, as if you didn’t know it already, would import Canadian tar sands oil, would not meaningfully increase global pollution. This finding was attacked by environmental groups, and even another government agency, the EPA.

Before the election the President’s spokesperson said he had no plans for a carbon tax. It appears that he has changed his mind.  

Could this be the result they have in mind for oil and gas?

Speaking of climate change, as in any debate the same data can be used bydifferent sides for opposing purposes.  But there is always someone who seeks somthing closer to the rational center of the debate than do the radical elements.