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.

BY CHANCE DECKER

The oil patch breathed a collective sigh of relief on June 13 when the US Fish and Wildlife Service announced it would withdraw its proposal to list the dunes sagebrush lizard (which inhabits parts of eastern New Mexico and Texas’s Permian Basin) as threatened or endangered under the Endangered Species Act (the ESA). A threatened or endangered listing could have put the clamps on oil and gas exploration and production in west Texas and eastern New Mexico, along with the booming local economies that depend on those industries. According to Secretary of the Interior Ken Salazar, “voluntary conservation efforts of Texas and New Medico, oil and gas operators, private landowners and other stakeholders” led to the decision not to list the species.

When it was first announced that the dunes sagebrush lizard was being considered for the listing, the Texas legislature acted. Senate Bill 1 of the 82nd Legislature in 2011 authorized Texas Comptroller of Public Accounts Suaan Combsto coordinate the development of voluntary endangered species conservation plans while balancing economic needs of the state. The lizard (classified as an official species only in 1992) was the first to be addressed under that authority. Under Senate Bill 1, the Comptroller, in coordination with the Southwest Region of FWS, came up with a Candidate Conservation Agreement with Assurances (CCAA) for the dunes sagebrush lizard.

In nutshell, the CCAA establishes incentives for private landowners and lessees (primarily, oil and gas producers) to preserve the lizard’s primary habitat – the shinnery oak sand dune. In turn, those landowners and lessees will enter into conservation agreements with FWS that provide that, as long as certain preservation measures are carried out on their property, they will not be forced to do anything else if the lizard is ever listed as threatened or endangered under the ESA.

The primary conservation activity FWS wants from oil and gas producers is a commitment not to “blow out” the shinnery oak sand dune in the Permian Basin. According to FWS, directional drilling technology now makes it possible to economically extract oil and gas from formations under shinnery oak sand dunes from drill sites located elsewhere.

If you think you’ve heard the last of the dunes sagebrush lizard, think again. The FWS has said that it would “absolutely” consider renewing its proposal to list the lizard as threatened or endangered if FWS determines the Texas CCAA is not accomplishing its goals. While the Texas CCAA and the individual landowner and lessee agreements are designed to protect landowners and mineral producers when and if that listing occurs, there is no guarantee the CCAA (which is a complex 179 page plan) will be properly enforced.

The predator returns.

I don’t usually forward content created by others, and I try to avoid overtly political entries, but this one is from the June 14 Daily Policy Digest of the National Center for Policy Analysis.  It is worth reading if you pay attention to energy and environmental policy: 

“For the last three years, the Environmental Protection Agency (EPA) has justified new air quality regulations — unprecedented in stringency and cost — on the assumption that even trace levels of particulate matter can cause early death. The EPA’s guiding principle in this effort has been that there is no price too high to preempt further particulate reduction, says Kathleen Hartnett White, a senior fellow at the Texas Public Policy Foundation.

“The EPA has gone so far in this endeavor as to claim that its rules will save 230,000 lives by 2020. However, such rhetoric is built on implausible assumptions, biased models, statistical manipulations and cherry-picked studies.

•The EPA emphasizes the killing potential of airborne particulate matter, yet physicians and toxicologists have found little evidence of this drastic conclusion.

•The EPA’s zero-tolerance principle for health risks compels it to herculean regulatory ends, including reducing particular matter below levels found in nature.

•Natural background levels of 1 microgram of fine particulate matter per cubic meter will logically become the next target for the EPA.

“The EPA’s claimed mandate places it on a losing path; particulate matter realistically cannot be reduced below certain ambient levels. Nevertheless, its rules will impose enormous cost on the economy in an ill-advised effort to accomplish exactly this.

•Indoor levels of fine particulates are far higher than outside levels.

•Simple tasks such as cleaning a closet and cooking expose individuals to high levels of particulate matter that cannot be reduced by regulation.

•Nevertheless, the EPA will continue to make a show of targeting particulates under the guise of fulfilling the directives of the Clean Air Act.

“Interestingly, the national standard for acceptable particulate matter concentration remains at 15 micrograms per cubic meter. Were the EPA truly so convinced of the rightness of its conclusions, one would think it would be quick to revise this standard. The fact that it hasn’t suggests that EPA regulators are well aware of the fallibility of their claims.”

Source: Kathleen Hartnett White, “The EPA’s Flawed Zero Tolerance Policy,” Daily Caller, June 4, 2012.

That is what the NCPA says about the situation. On the other hand is a report from GreenFacts Initiative supporting the proposition that perhaps current standards should be revisited. This group approached the issue from a scientific viewpoint and didn’t concern itself with cost, which is the NCPA’s point – the regulations cost too much for what they deliver.

BY CHANCE DECKER

Kurt Mix’s nightmare probably won’t happen to you, but ignoring electronic discovery laws could cause you big problems in litigation.

You might have heard of Mr. Mix, the former BP engineer now facing federal obstruction of justice charges for deleting text messages about the 2010 Gulf oil spill. His nightmare is playing out in a federal court in New Orleans, and the government is not backing down.

Mr. Mix is accused of intentionally destroying evidence, which is not what most litigants do.  But it is not unheard of for parties to accuse their opponents of the practice to gain an advantage in litigation.  You can reduce your exposure to e-discovery violations, and (and sleep peacefully) by following a few simple steps.

  • KNOW YOUR DATA STORAGE POLICIES. Most organizations with large data storage needs have automatic email and/or document deletion policies. All emails, text messages and other electronic message media not specifically stored in a particular folder on a company’s email server are automatically deleted once they reach a certain age. Reducung the amount of “junk” being stored makes it easier to locate and preserve relevant electronically stored information (“ESI”). In order to know what steps need to be taken to preserve ESI, know your company’s data storage and deletion policies.
  • PRESERVE AT THE FIRST SIGN OF TROUBLE. In general, litigants are required to “preserve” relevant and “reasonably accessible” electronically stored information as soon as they become reasonably aware that such data could be relevant to litigation or a government investigation. This means you should preserve ESI even before a lawsuit is filed if you have reason to believe litigation might ensue. As soon as you become aware of potential litigation or investigations, suspend your document and email deletion policies, and save text messages or other communication media on any of your employees’ computers, laptops, blackberries, or other mobile devices. With e-discovery rules, you’re better safe than sorry.
  • CONSULT WITH YOUR I.T. STAFF. They speak the e-discovery lingo, and can help identify where and how your ESI is stored and how it can be preserved. They can help ensure that no relevant ESI is destroyed after a duty to preserve arises. Knowledge is power, and your IT guys have it.
  • EDUCATE EMPLOYEES. If your employees do not know they should preserve ESI, they will not do it. It is imperative that you educate your employees—from the roughnecks on the rigs to the executives in the office—on their data preservation duties before a problem arises. As soon as you learn that litigation or a government investigation may be on the horizon, someone should send a memo (a “litigation hold letter”) instructing employees to immediately begin preserving their ESI and instructing them on whom to contact for help.
  • KNOW YOUR ROLE. Nominate individuals within the company whose job duties include various parts of the data preservation process. Likely candidates are in-house lawsyers, management-level employees, the records department, and the IT staff. Your lawyers can send out orders and help set policy for the preservation of ESI, your management level team can help make sure your employees are preserving their ESI, and your IT staff can make sure your information is properly stored and backed up. Having a team in place whose mambers know their roles will prevent things from slipping through the cracks and potentially relevant information from being destroyed.

You’re driving while texting your engineers about enhancing reservoir performance with LPG gel fracturing technology, and you rear-end a broken-down 15-year old Kia. The owner demands to be made whole. Is he entitled to the equivalent of another jalopy just as good as the one he had or, say, the brand-new Mercedes he says he needs? The Louisiana Supreme Court, in its latest pronouncement in a legacy pollution case, says he gets the jalopy.

 In  Eagle Pipe and Supply, Inc. v. Amerada Hess Corporation, a plaintiff who purchased property after environmental damage had been done did not have a right of action against those who caused the damage unless his seller specifically transferred that right in the Act of Sale.  That right was not transferred to Eagle. Thus, the subsequent purchaser doctrine deprived the plaintiff of its “Mercedes”.  The  court also rejected the plaintiff’s contention that the continued pollution was an ongoing tort, denying that cause of action. The court’s view was that the pollution was a result of past activities and not ongoing action in and of itself.

On a practical level, the rationale of the majority of the court is that the buyer is presumed to know the overt condition of the property when he buys it and to take that condition into account in agreeing to the sales price. Here, the plaintiff made an as-is, where-is sale.

For those wondering how different the civil law can be from the common law, the decison features a thorough analysis of Louisiana law pertaining to the transfer of property. Welcome to the difference between jurisprudence constante (judicial decisions are persuasive) and stare decisis (decisions are authoritative); obligations that are personal (a right that can be enforced by the obligee only), heritable (the right can be transferred) and real (such as servitudes and other aspects of ownership ); and stipulations pour autrui (think third party beneficiary in common law).   

The Louisiana Mineral Code requires a servitude owner to return property used in oil and gas activities to its original condition after use has been terminated.  Could there be a different result with respect to liability of a servitude owner to the surface owner?  The extent of that liability is not clear. Does the subsequent purchaser doctrine also bars claims against

On a practical level, the rationale of the majority of the court in this 4-3 decision is that the buyer is presumed to know the overt condition of the property when he buys it and to take that condition into account in agreeing to the sales price. Here, the plaintiff made an as-is, where-is sale.servitude owners under the Mineral Code where the plaintiff knew what he was purchasing and made an as-is-where-is sale?  If the property must be returned to its original condition, should it be the condition when the plaintiff purchased the property? Finally, when does the duty to restore the surface accrue? Not until operations are complete?

This decision does not signal the end of this debate. Eagle is one of many similar cases working their way through the Louisiana courts.  Legislation on this subject has passed the legislature and will be the subject of another post soon.