I promise this will be the last post in a while on covenants running with the land. I think we all get it by now (This topic was discussed in my August 1 post).

The Result

A Joint Operating Agreement referenced in documents that is in a party’s chain of title and is, by its terms, binding on “ . . . the parties hereto and to their respective heirs, devisees, representatives, successors and assigns.” will bind that party, according to TransTexas Gas Corp. v. Forcenergy Onshore, Inc. That language establishes the agreement as a covenant running with the land.

What makes this rather mundane decision (mundane to you and me, probably not so to the parties) worthy of your attention is the focus on the JOA, letter agreements and a complicated series of assignments (of deep rights, shallow rights and other, deeper rights) at various times among a number of parties, most of which were entered into over 20 years ago.

The lesson

Keep your land files and records complete, accurate and in good order. Sometimes those who follow behind the original players are going to be put to the task of recreating a transaction, or the history of the parties’ performance of a transaction. The party without good land records is at a serious disadvantage.

A more obvious lesson

Don’t ask for relief in one suit by relying on the existence of a contract to which you are a party and then in another suit, deny that the contract burdens your interest. You can seldom have it both ways.

The Case

Trans Texas and Forcenergy owned interests in the same lease, and disagreed over the applicability of a non-consent provision of a JOA entered into by their assignors. TransTexas did not consent to Forcenergy’s drilling proposals, resulting in relinquishment of the working interest until 400% of costs had been recovered by the consenting parties. Trans Texas sued to determine if the non-consent relinquishment provisions applied. TransTexas’ argument was that the JOA wasn’t in its chain of title and therefore its interest was not subject to the JOA. The JOA and the letter agreement by the parties’ predecessors were mentioned in earlier assignments that were recorded in the official public records, establishing constructive notice of their contents. Also, TransTexas judicially admitted that the agreement applied to its interest by suing for a TRO in an earlier case in reliance on the JOA.

And there is something for the bankruptcy clients and their lawyers: TransTexas’s rejection of the JOA in bankruptcy had no effect on Forcenergy’s ownership of relinquished interests because relinquished interests are excluded from the debtor’s estate under the Bankruptcy Code.

 

Highland Capital Mgmt., L.P. et al v. Ryder Scott Co. shows how far a plaintiff will reach to find deep pockets to pay for a bad investment. Here, the plaintiffs went after the reservoir engineers who made reserve estimates and to a purchaser who acquired notes after the plaintiff acquired theirs. There was a question about whether the engineers aided the brokers in the sale of the notes and whether proved reserve estimates constituted material representations. This was an appeal of a summary judgment, so nothing has been proven. Reversals of summary judgments are all about whether there are fact questions left for a jury to decide and not whether assertions have been proven.

Highland held unsecured interests in notes issued by Seven Seas, an oil and gas exploration company. Because the notes were sold and traded on the public markets they were subject to SEC regulations defining what an issuer can report as “proved reserves”. Highland’s purchase was based on estimates prepared by Ryder Scott, the reservoir-evaluation consulting firm. Seven Seas later issued secured notes to Chesapeake Energy. It was discovered that the proved reserves were much lower than originally believed. Seven Seas could no longer pay the interest and went into bankruptcy. Highland sued Ryder Scott and Chesapeake alleging fraud, negligent misrepresentation, and violations of the Texas Securities Act.

The court dismissed Highland’s claims for fraud and negligent misrepresentation. Highland failed to show evidence of either out-of-pocket damages or benefit-of-the-bargain damages, said the court.  There was no evidence of wrongdoing by Chesapeake, who purchased senior notes after Highland purchased its subordinated notes. The claim was that when buying the notes Chesapeake relied on the reserve reports which it knew were false and thus knew that the value of Highland’s interests would be destroyed by Chesapeake’s purchase. This was alleged as a conspiracy between Seven Seas and Chesapeake to decrease the value of Highland’s notes. For good reason (how about the absence of a motive?) the court didn’t buy that argument.

The court also dismissed the claim that Chesapeake aided and abetted Ryder Scott’s (alleged) securities fraud. To aid and abet, a person must have “general awareness” of its role in a securities violation, or render “substantial assistance”, or either intend to deceive the plaintiff or act with reckless disregard for the truth of the primary violator’s representations. Chesapeake testified that it had no knowledge that the reserve reports were false. Highland’s expert testified that Chesapeake should have known of the falsity, but “should have known” isn’t enough to constitute aiding and abetting, said the court.

A question remained whether the securities brokers (who weren’t parties to the litigation) were “sellers” under the TSA, so Ryder Scott could potentially be secondarily liable for aiding the brokers. There was also a fact question whether Ryder Scott’s estimates were material misrepresentations, despite strong cautionary language in the prospectus. The case was remanded to the trial court to determine those issues.  It appears that Highland will rely on the reckless disregard element to establish its case. 

 

 

Louisiana Governor Bobby Jindal signed into law two bills significantly revising Louisiana’s oilfield cleanup statute, La. R. S 30:29. The new law affects the procedures for remediating oil field pollution and resolving oilfield contamination claims.  The purupose is to expedite the remediation process and the resolution of claims.

For the highlights that were important to the Louisiana Oil and Gas Association, I refer to the analysis of Donald Briggs, president of LOGA, as reported by the American Oil & Gas Reporter in its July issue:

  • In an effort to accelerate remediation, parties can assume responsibility for environmental damage according to a regulatory standard without admitting liability for private damages.
  • Once a party claims responsibility, the Department of Natural Resources will structure a feasible cleanup plan.
  • Cleanup plans will be subject to review by the DNR, secretary of the Department of Environmental Quality, and the commissioner of agriculture.
  • Both the remediation plans and the agencies’ comments are admissible in court.
  • No employee, contractor, nor representative of the state is allowed to engage in any ex parte communications with department employees  while plans are being designed.
  • Any party that admits responsibility waives the right to enforce contractual rights to indemnification for punitive damages caused by the responsible party.

Other features of the new law are meaningful (as a lawyer, I gravitate toward the procedural stuff):

  • A defendant can request an early dismissal from a suit. There will be an evidentiary hearing at which the plaintiff can provide evidence of the defendant’s liability. The defendant will have an opportunity to rebut. The defendant could be brought back into the suit if evidence is discovered later in the proceeding.
  • A plaintiff can interrupt prescription by delivering a notice of intent to investigate to the DNR. Certain information must be included in the notice.

To say this musical interlude is relevant to today’s topic is a stretch. But what if the aforesaid Gov. Jindal becomes one heartbeat away from the presidency?  Other than that, it’s here because I like it.

This non-oil and gas case should be of interest to startups and those of you who run “lean and mean” operation.  Thanks to Jerry Murray at Goldin Peiser & Peiser, LLP for bringing it to my attention.

You file the paperwork to set up a corporation so that your personal assets are shielded from assault by unprincipled plaintiff’s lawyers and their predatory lawsuits. You then get so busy searching for the next Daisy Bradford No. 3 that you ignore those pesky notices from the Secretary of State and the Comptroller.  In the meantime, your ambitious enterprise runs into a few hicccups. True to form, the bottom-feeding plaintiff and his lawyer – who must be as dumb as he is shameless – sues you personally even though even he should know that you have a corporation and are protected.

Surprise!  That lawyer and his client might know somethign you don’t.  Suntide Sandpit, Inc. v. H & Sand and Gravel, Inc. says that in Texas you could be personally liable if those letters you ignored were requests that you pay the corporate franchise tax and file annual reports.

Each officer and director of a Texas corporation whose charter has been forfeited for the failure to provide a report or pay a tax or penalty are liable for each debt of the corporation created or incurred after the date on which the report, tax or penalty is due and before the corporate privileges are revived. There are exceptions: For example, a director who objected or had no knowledge of the debt is not liable; personal liability attaches only to those directors and officers of the corporation at the time the debt is created or incurred; and the liabilities do not attach to tort judgments based on negligence; and reinstatement of the charter within 90 days is retroactive.

The entity in this case wasn’t in the oil business; however, charter forfeiture is not uncommon for corporations whose shareholders are too busy producing oil and not busy enough tending to their mundane corporate housekeeping obligations. There is potential exposure.

In this case, the directors and officers had no personal liability, but that was for reasons peculiar to this case, and the result was from an appeals court, which means after the directors lost at the trial court and incurred a gusher of legal fees.

 

Question: Can a landowner enforce a right of first refusal bargained for by his predecessor? Answer: It depends. (Note to self: Why do you always say that in your posts?  Because, as Texas Rangers’ manager Ron Washington might say, “That’s the way the law go”.)  The answer in MPH Production Co. v. Smith et al, was yes, he can. But that’s not always the result.

The Horans owned land in Harrison County, Texas. In 1979, they sold their mineral rights in the property, but reserved a first right of refusal – the opportunity to purchase the rights on the same terms as any future prospective buyer. Two years later the Horans sold their interest in the surface to the Smiths.

Many years and many conveyances later, MPH purchased the minerals without first giving the Smiths the opportunity to match the offer. The Smiths attempted to enforce the right of first refusal and to purchase the minerals from MPH. MPH refused and the Smiths sued.

The issue was whether the first right of refusal was a covenant running with the land. If the right of the Horans – the original reserving party – to buy back the minerals was connected to the land, then the Smiths acquired the right when they acquired the surface.

The Law

In Texas, a covenant runs with land when:

(1) it touches and concerns the land,

(2) it relates to a thing in existence or specifically binds the parties and their assigns,

(3) it is intended by the original parties to run with the land,

(4) the successor to the burden has notice, and

(5) the parties are in privity of estate when the covenant was established.

Rights that do not run with land are personal to the parties to the agreement in which the rights were creted, and subsequent owners cannot enforce them.

The Law and This Case

The answer to the question depended on the intent of the parties in the 1979 deed, which did not state explicitly that the obligations of the grantees (MPH’s predecessors) would bind subsequent owners. Without this express reservation, the court had to rely on Texas case law implying restrictions by law. The court found that the Horans and the Smiths were in privity of estate, so that the Horans’ right of refusal was included in the “bundle” of rights transferred to the Smiths in the 1981 Deed. Thus, the answer to the question ws that the right of first refusal was a covenant running with the land.

The Takeaway:

If you are a party to a deed, say what you mean.  Courts look to the language of the agreement to divine the parties’ intent. If you want a reservation – or any other right or obligation – to be a covenant to run with the land, make your intent clear. Some lawyers would suggest that the parties specify that the rights apply to the grantor/ee, and their successors and assigns. Or that the deed say that it is the parties’ intention that this reservation be a covenant running with the land.

If you are buying minerals and see a right of first refusal in the chain of title, be mindful of this case.

BY CHANCE DECKER

Here in the south, we know all bourbon is whisky, but not all whisky is bourbon. In El Paso Marketing, LP and Enterprise Pipeline LLC v. Wolf Hollow I, L.P., the Texas Supreme Court held that all natural gas is power, but not all power is natural gas.

The Dispute

This case was about a gas transportation and supply contract. Wolf Hollow (owner of a gas-fired power plant and buyer of gas) sued Enterprise (owner of the pipeline supplying gas to the plant) and El Paso (who managed the plant’s fuel supply). The problem was service interruptions and delivery of substandard gas. Wolf Hollow sought reimbursement for the cost of replacement power it bought to supply its customers while the plant was shut down. Wolf Hollow claimed the costs were Uniform Commercial Code “cover” damages. El Paso claimed the replacement power costs were consequential damages, waived by Wolf Hollow under the supply agreement.

The Ruling

The Texas Supreme Court sided with El Paso on the “cover” issue. The replacement power was not “cover” under the U.C.C.

The Rule

The UCC says that when a supplier fails to meet its delivery obligations, the buyer can “cover” by “making in good faith . . . any reasonable purchase of . . . goods in substitution for those due from the seller.” Under the U.C.C., consequential damages do not include cover damages. Thus, when a supplier breaches its delivery obligations, a buyer can “cover” and sue for damages even when the contract waives consequential damages.

The Rationale

Wolf Hollow claimed that by purchasing replacement power it discharged its delivery obligations to its customers just as if it had purchased replacement gas. El Paso argued the replacement was “substantially different” from the gas due under the agreement, and thus not “cover.” The court agreed with El Paso. The power Wolf Hollow bought was not a replacement for gas due under the contract; it was a replacement for the electricity Wolf Hollow was to produce from the gas. The gas was power, but the power was not gas.

Thankfully for Wolf Hollow, the agreement allowed Wolf Hollow to sue for the cost of replacement power if certain conditions were met even though the power was not U.C.C. “cover”.  The Court remanded the case to determine if those conditions had been met.

The Takeaway – You Need an Alternative Damage Clause

What does the case mean? No, not that you need a stiff drink. It shows the importance of  having a detailed alternative damage clause in your gas transportation and supply contract. When a supplier can’t meet its delivery obligations, it’s usually because of supply disruptions. That means replacement gas will be hard to find. If your contract contains a consequential damage waiver – and most do – you can’t buy replacement power or gas that is substantially different from the gas due under your contract and collect cover damages unless your contract contains an alternative damages clause. Without one, you may need a shot of bourbon yourself. I recommend Garrison Brothers from the Texas Hill Country.

 Finally, a criminal case those who raise money should consider.  Hays v. State  informs us of several basic rules to follow when selling oil and gas interests to strangers. They are simple but important:

Rule 1: If you tell your targets that you are raising the money to drill a well, you should go ahead and actually drill the well. Otherwise, you will go to jail.

Rule 2: If you sell unregistered securities but don’t know it is against the law to sell unregistered securities, you will go to jail.

Defendant Chad Hays asserted that the State was required to prove that he knew the securities he was selling were required to be registered. According to the court, the Texas Securities Act does not require a culpable mental state as to the circumstances of the offense charged. In other words, the sale of unregistered securities is a nature-of-conduct offense, akin to gambling or indecency with a child. The nature of the conduct itself is criminal because the goal is to protect the public. This is contrasted with crimes in which is achieving a certain result is the crime.

The State was not required to prove that Chad knew of the illegality of selling unregistered securities. The only thing the State had to prove was that Chad knew he was selling venture interests in an oil well prospect, not that he had knowledge that the statute defined those interests as securities, or that he was required to register them.

Chad’s most ambitious defense was that the State hadn’t proved that Chad was the person who made the calls. Four victims testified that they talked on the phone with “Chad”, or someone representing themselves to be Chad; they all invested in the prospect; Chad was an officer of the company that promoted the prospect; the defendant was identified in open court as Chad; documentary evidence showed that a person name Chad was soliciting investments for the venture. That defense did not work with this jury.

There may be cynical humor in Chad’s misfortune, but there is a warning here for anyone raising money from strangers.    Be sure you are not selling an unregistered security.  Even if, unlike Chad, you drill the well you promised, there is exposure if it isn’t the best well they ever invested in.

Today’s musical interlude is dedicated to Chad’s mother:

Why don’t we learn from other people’s mistakes? I have no idea, but Sewing v. Bowman is a good example of what happens when we don’t. The question was whether or not two friends of almost 50 years formed a partnership. This case is not about buying leases and drilling wells, but it very well could be.  The court said there was a partnership, but life (and death) would have been easier if there had been a written partnership agreement.

The friends orally agreed to develop real estate and share in the profits. They never got around to reducing their agreement to writing. When one partner died, his estate sued for the value of his partnership interest.  The surviving partner argued there was insufficient evidence of formation of a partnership, and that the claim was barred by the Statute of Frauds because it involved the transfer of real estate, which requires a writing.

The court noted that a written contract is not necessary to show the existence of a partnership. Instead, the court looks to the totality of circumstances in considering whether factors required by the Texas Revised Partnership Act are present. The surviving partner’s own testimony showed that money was contributed to the business, and the parties intended to be partners, share in profits, and share in losses. Evidence of four of the five partnership factors was sufficient to support the trial court’s decision (the other factor being the right  to particpate in control). The Statute of Frauds did not bar the claim. Merely because the oral partnership agreement involved real estate transactions did not transform the partnership itself into a transaction for the sale of real estate.

Think how much grief, anxiety and expense the decedent could have saved the family he left behind with a just a little forethought.

This case tells us what lawyers who want to avoid trouble tell their clients: “You all have the best of intentions, everybody trusts everybody else, your wives are friends, and (plug in other factors to signify nothing will ever go wrong with the relationship. My personal favorite: You met in church).  But put the agreement in writing . . . now . . . before somebody gets run over by the proverbial bus (powered natural gas, of course) or changes his mind, or the deal goes south and the creditors are circling like vultures.

 

“Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns — the ones we don’t know we don’t know.”

Donald Rumsfeld. Feb 12, 2002. 

 

Exxon Corporation et al v. Miesch et al is another skirmish in the long war between Exxon Corporation and its lessors, the Miesch family. The Exxon lease, from the 1950’s, called for a 50% royalty. During negotiations for a lower royalty, Exxon made representations about whether the reserves under the leases were depleted. The data furnished by Exxon did not include materials and information on undeveloped formations.

Which brings us to Mr. Rumsfeld.  Exxon claimed that this case was similar to other misrepresentation cases where the plaintiffs had knowledge sufficient to inform them of the truth. The court said no. The Miesches did not know what they did not know; that is, the information Exxon hid prevented them from knowing what information they would need to decide whether Exxon was telling the truth. In the other cases “the plaintiffs knew what they did not know.” They did not need the hidden information to have the knowledge necessary to know the truth. 

This case has been to the Texas Supreme Court twice, once between Exxon and the Miesches and once between Exxon and Emerald Oil & Gas Company, who took a lease after Exxon plugged the wells and refused to give well and field data to the Miesches. At issue in the earlier Emerald appeal was the accusation that Exxon left junk in old wellbores, making it impossible for any other party, such as Emerald, to reenter the well.  That decision was the subject of a Looper Reed Client Alert.

Exxon asserted that the fraud claim was barred because this was really a contract suit. The court disagreed and found that this was a claim for fraudulent inducement, regardless of whether the fraudulent representations were subsumed in a contract, and also because the Miesches’ losses were different than their contract damages.  

Incidentally, the Miesches claims for negligence per se, gross negligence, tortious interference and violation of the statutory duty to properly plug wells were barred by limitations. The Miesches knew more than two years before they filed suit of Exxon’s actions that caused damage to the well.

Another story of betrayal inspires a musical interlude.

It ‘s tough to find an interesting picture of a title dispute, so here’s a musical interlude.  You never can tell how the court will construe a complicated property deed. 

Can the seller of land retain half of the minerals he owns in the property if he doesn’t actually reserve anything? Yes, he can, says Hunsaker v. Brown Distributing, Ltd.. This is another mineral title decision that could cost you lots of money if you don’t pay attention. 

Hunsaker owned 1,120 acres in La Salle County, Texas, which he conveyed to Brown by warranty deed. He conveyed either his entire one quarter mineral interest, or only one half of his one quarter. We can all agree there is a big difference.

The Deed

In the deed, Hunsaker “grants, sells, and conveys” land in Exhibit A. Exhibit A described the property by metes and bounds, and then said: “There is also included in this conveyance one-half (1/) of all oil, gas and other minerals . . . now owned by Grantor”. At the end of the deed, was the following: “This conveyance is made and accepted subject to all reservations, . . . now outstanding and of record”. The deed then listed reservations, including “An undivided one-quarter (1/4) interest in and to all of the oil, gas and other minerals and mineral rights reserved as set out in a particular deed”, and “One-half of all oil gas and other minerals in [another particular deed was identified and the specific language was quoted]”. (emphases is mine)

The Analysis

Brown argued that the deed conveyed Hunsaker’s entire one quarter mineral interest, because Hunsaker did not specifically reserve any minerals. Hunsaker responded that he did not reserve one half of his mineral interest, but emphasized that he was not required to reserve anything, because the deed conveyed only one half of his mineral interest.

The court construed the deed to convey one half of Hunsaker’s one quarter. Given the outstanding reservations at the time of the deed, it was clear that Hunsaker could not have owned half of the minerals because at least that portion had already reserved in prior deeds. Therefore he could not have conveyed one-half. The conveyance must have been one half of what the owned.

The Takeaway

There are two.  First, draft the conveyance and reservation language, and then read it again. Better yet, let your colleague read it and tell you if he or she comes up with the result you intended. 

Second, the court is unlikely to let you rely on one provision that gives the result you want if doing so will negate the effect of other, contrary provisions.  The court’s job when construing a deed is to “harmonize all parts” of the document and determine the parties’ intent from the entire document. If there is a construction that gives meaning to all of the seemingly conflicting provisions, the court is likely to apply it.