Texas Supreme Court Holds JOA Exculpatory Clause Applicable to All Activities of Operator

By Jana Grauberger

The Texas Supreme Court distinguished several Texas appellate court decisions and held the exculpatory clause in a joint operating agreement (“JOA”) applicable not just to operational activities undertaken by the operator, but to all activities of the operator under the JOA. Reeder v. Wood County Energy, LLC, No. 10-0887, slip op. (Tex. Aug. 31, 2012). JOA exculpatory clauses often relieve the operator of liability to nonoperators absent a showing of gross negligence or willful misconduct on the part of the operator. In recent years, appellate decisions in Castle Tex. Prod. Ltd. P’ship v. Long Trusts, 134 S.W.3d 267 (Tex. App. – Tyler 2003, pet. denied), IP Petroleum Co., Inc. v. Wevanco Energy, L.L.C., 116 S.W.3d 888 (Tex. App. – Houston [1st Dist.] 2003, no pet.), Cone v. Fagadau Energy Corp., 68 S.W.3d 147 (Tex. App. – Eastland 2001, pet. denied), and Abraxas Petroleum Corp. v. Hornburg, 20 S.W.3d 741 (Tex. App. – El Paso 2000, no pet.), held that the exculpatory clause extends only to claims related to operations, i.e., drilling and not to other breaches of the JOA. The Texas Supreme Court stated that those cases all involved interpreting the exculpatory clause language of either the 1977 or 1982 A.A.P.L. Model Form Operating Agreements, which both require the operator to conduct “all such operations” in a good a workmanlike manner and only allow for liability as to nonoperators for failure to do such upon a showing of gross negligence or willful misconduct. In contrast, the JOA in Reeder was based on the 1989 A.A.P.L. Model Form Operating Agreement, which references “its activities under the agreement” in place of “all such operations.” The court agreed with commentators that the 1989 Model Form language provides more expansive protection for the operator than do the 1977 and 1982 Model Forms and requires a showing of gross negligence or willful misconduct in order to hold the operator liable to nonoperators in relation to any of the operator’s activities under the JOA. The court found insufficient evidence of gross negligence or willful misconduct as to claims against the operator in Reeder.

For a copy of the decision click here.

Fifth Circuit holds purchase and sales agreement complies with Statute of Frauds

By Joanna Nelson

Preston Exploration Co., L.P. v. GSF, L.L.C., Cause No. 10-20599, 2012 U.S. App. LEXIS 1873 (5th Cir. Tex. Feb. 1, 2012)
 

The Fifth Circuit recently vacated a judgment in the U.S. District Court for the Southern District of Texas, holding that the lower court had improperly conflated “two distinct principles – whether parties come to a meeting of the minds as to the subject matter of a contract with whether a writing’s legal description is sufficient to meet the statute of frauds.” Preston Exploration Co., L.P. v. GSF, L.L.C., Cause No. 10-20599, 2012 U.S. App. LEXIS 1873, *12 (5th Cir. Tex. Feb. 1, 2012). The parties’ dispute involved uncompleted exhibits to three Purchase and Sales Agreements (“PSAs”) entered into for the sale/purchase of certain oil and gas leases. Id. at *2. The exhibits, which were specifically referenced and incorporated into the PSAs, included a document “describing oil & gas leases to be conveyed and a reference to a different exhibit as the document setting out the form of the assignments to be delivered at closing. Id. at *4. The Seller, who had executed all three PSAs without complaint despite the PSAs providing for payment of a non-refundable deposit that amounted to $11 million, ultimately refused to close on the sale. Id. This suit followed.
After a three-day bench trial, the District Court determined that exhibits to the PSAs “did not contain enough information to be statute of frauds compliant” and that “the exhibits were not finalized at the time the PSAs were executing . . . [and thus] could not be incorporated into the PSAs.” Id. at *5. Without the exhibits, the District Court held that PSAs were not enforceable because they did not furnish “the means or data by which to identify the leases to be conveyed with reasonable certainty.” Id. at *5-6. The District Court also held that the Seller was not entitled to a return of the $11 million down payment, which holding was not challenged on appeal. Id. at *6.
The Fifth Circuit disagreed with the District Court on enforceability because “the PSAs do contain some indication of what is to be conveyed . . . [and] specifically provide that [Seller] is to convey all of Seller’s right, title and interest in and to all oil and gas leases as defined in Exhibit A.” Id. at *9-10. Internal quotes and brackets omitted. The Fifth Circuit noted that the “assignment documents could not be final at the signing of the PSAs because it was clearly intended by the parties that title work remained to be completed” and that the “PSAs specifically include provisions for curing title defects and for adjusting the contract price for any title defects which could not be cured.” Id. at *11. The “PSAs clearly reflect the intention of the parties and a recognition that there was still some title work to be done before a final determination could be made as to the leases which would ultimately be conveyed.” Id. The District Court thus “misconstrued this lack of finality as to the assignment documents as evidence that there was no meeting of the minds as to the subject of the contract.” Id. at *11-12. If, however, there had been no meeting of the minds, “there would be no contract whatsoever and the statute of frauds issue would be moot.” Id. at *12.
Because the intentions of the parties were clear by the terms of the PSAs and the “attached exhibits were all part of the same transaction and should be construed together,” the lack of finality of the exhibits did not prevent their consideration as part of the contracts to convey the property. Id. at *14-15. Though limiting enforcement of the PSAs to “those leases identified by recording information,” the Fifth Circuit held that the Buyer “may obtain specific performance” of the PSAs and remanded the case for “proceedings consistent with this opinion.” Id. at *15-16.
 

Texas case holds seller bound to terms of forged document

By James T. Kittrell

The Texas Court of Appeals for the Eleventh District of Eastland has recently held that a seller of an oil and gas property may be held to the terms of a forged purchase agreement if the seller properly signs an assignment that specifically incorporates the terms of the forged document. Raven Resources, LLC v. Legacy Reserves Operating, LP, No. 11-09-00348-CV, 2012 Tex. App. LEXIS 310, (Tex. App. Eastland, Jan. 12, 2012).

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Texas Court Upholds Lease Cancellation for Failure to Pay Shut-In Payments To Proper Party

By Kevin Connolly:

In Nitschke v. Circle Ridge Production, Inc., No. 12-09-00150CV, _____ S.W.3d ____ (Tex. App.—Tyler 5/5/2010), the Tyler Court of Appeals upheld a trial court’s findings of fact and conclusions of law with respect to the termination of an oil and gas lease for failure to pay shut-in royalty payments to the proper party.   The case involved a dispute between the original lessee and a top lessee.  Ultimately the original lessee lost its lease because it made shut in payments to its lessee, rather than the current royalty owner, to whom those payments were owed.

 

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U.S. Fifth Circuit Finds Contractual Claim Under JOA Not Impermissible "Collateral Attack"

By Robert L. Theriot

In EOG Resources Inc. v. Chesapeake Energy Corp., No. 09-30362, __ F.3d __ (5th Cir. 4/29/10), the Fifth Circuit reinstated EOG's contractual claim against Chesapeake under the parties' joint operating agreement (JOA).  EOG claimed that Chesapeake had unilaterally drilled three wells in the parties' pooled mineral leases in Bossier Parish, Louisiana, without first obtaining EOG's written consent as required by their JOA.  The trial court dismissed EOG's claim, finding the contractual claim was barred as an impermissible "collateral attack" on the orders of the Louisiana Commissioner of Conservation, because the Commissioner had approved Chesapeake's application to drill the wells as alternative unit wells for the pooled zones.  On appeal, the Fifth Circuit reversed and vacated.  It found that EOG's contractual claim was not barred as a collateral attack on the Commissioner's orders and remanded for a determination of EOG's claims.  The author represented EOG in the trial court and on appeal.

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Texas Court Analyzes When Operator "Actually" Commences Operations Under JOA

By Natalie Barletta:

             The principal issue addressed in Valence Operating Company v. Anadarko Petroleum Corporation, 303 S.W.3d 435 (Tex. App.—Texarkana 2010, no pet.h.), is whether Valence actually commenced work on its proposal to drill four wells within the time specified by the parties’ joint operating agreement (“JOA”). The JOA contained a provision covering Valence’s proposal to drill the wells in the unit. The provision stated that the party desiring to drill “shall give” notice to the other parties to the agreement “specifying the work to be performed” and that the parties receiving notice “shall have thirty days after receipt of the notice” to give notice of their election to participate in the drilling operations. Anadarko did not consent to Valence’s proposed drilling operations. 

            Valence, therefore, became operator as to its proposed operations and was required to “actually commence work” by March 17, 2000. Once operations began, Valence was required to “complete [operations] with due diligence.” Anadarko, however, filed suit, arguing that Valence failed to commence operations before March 17, 2000. Valence conducted the following activities before the deadline expired: prepared an authorization for expenditures, received topographic map of locations, surveyed and staked locations and took pictures of well sites, obtained preliminary list of title instruments, held meetings to discuss locations and how to build on those locations, prepared detailed cost and facility estimates for the four wells, prepared preliminary run sheets, and obtained permits for the wells from the Texas Railroad Commission. After the deadline had passed, Valence built access roads, signed drilling contracts and began drilling. 

            The court held that Valence’s pre-deadline activities were not sufficient as a matter of law to establish actual commencement of work on the proposed operation within the meaning of the JOA. The issue was, therefore, properly submitted to the jury.

Texas Court Upholds Temporary Injunction, Finds Cash in Lieu of Bond Meets Statutory Requirements

By Marie Carlisle: 

           The principle issue addressed in Adobe Oilfield Services v. Trilogy Operating, Inc., No. 11-09-00162-CV (Tex. App.—Eastland January 29, 2010), involves the granting of a temporary injunction to prevent the filing of liens against oil wells. Trilogy entered into contracts with Adobe to drill six wells. Trilogy paid Adobe’s invoices for the first five wells, but was subsequently contacted by PNC Bank claiming a security interest in Adobe’s accounts receivables and a right to the amounts owed to Adobe for the sixth well. Trilogy held the amount still owed to Adobe in suspense, eventually depositing the funds into the registry of the Court. Adobe then threatened to file liens against all six wells for the unpaid amounts owed, causing Trilogy to file suit seeking injunctive relief to protect the wells from the threatened liens. Trilogy offered proof that it had a contractual obligation to protect the wells from liens, that the placement of liens on the wells would have a negative impact on Trilogy and its ability to serve as operator for the wells, and that it had paid all amounts owed to Adobe either directly via check or by depositing such sums with the Court. Trilogy also offered proof that Adobe had a contractual obligation to pay its subcontractors to prevent the filing of liens against the property. The trial court granted the temporary injunction, and the Court of Appeals upheld the injunction because Trilogy was able to show that it had a cause of action against Adobe, it had a probable right to the relief sought, and that there would be probable imminent and irreparable injury if the liens were filed.

            A secondary issue in the case involves whether or not the deposit of a sum of cash into the trial court’s registry is sufficient to satisfy the requirement of filing a bond with the court. Pursuant to the trial court’s order, Trilogy deposited $1000 cash as security for a temporary injunction field against it, as well as $300,000 cash into the registry of the court. The court’s order, however, was not conditioned as required by TRCP 684, and appellants asserted that this failure voids the temporary injunction. The Appellate Court, however, followed the decision of the Dallas Court of Appeals in finding that Rule 14c, which allows for the deposit of cash in lieu of a bond, automatically incorporates with a cash deposit the conditions for a proper statutory bond. See Seib v. American Savings & Loan Ass’n of Brazoria County, No. 05-89-01231-CV, 1991 WL 218642 (Tex.App.—Dallas 1991). 

Federal Court Remands Mineral Lease Dispute for Lack of Evidence of Amount in Controversy

By Emma J. Hinnigan


In Sullivan v. Chesapeake Louisiana, L.P., 09-0579, 2009 WL 3735798 (W.D. La. Nov. 6, 2009), the Western District of Louisiana remanded a case seeking rescission of a mineral lease back to state court after the defendant failed to provide proof of the amount in controversy, namely the total value of the lease. The Sullivan plaintiff filed suit in state court seeking rescission, alleging that (1) the bonus payment was paid untimely, and (2) the defendant had violated Louisiana’s Blue Sky Law. The defendant filed a notice of removal, in response to which the plaintiff argued that the market value of the lease bonus fell far short of the requisite jurisdictional amount. However, because the plaintiff was seeking declaratory relief, the amount in controversy was not merely the potential monetary judgment, but the total value of the lease, including the value of any undisturbed minerals. The court explained that because the value of the undisturbed minerals was not “facially apparent,” it would look to affidavits or other “summary judgment-type” evidence to determine the amount in controversy. However, the defendant only offered two unauthenticated press releases that referenced production rates for wells in the same area. The court concluded that the press releases were inadmissible hearsay, and ultimately held that the defendant failed to satisfy its burden of showing that federal jurisdiction existed.

 

Texas Court Holds Produced and Stored Oil Transferrable as Personal Property in Assignment

By Sarah Steward-Lindsey

In ERG Resources, LLC v. Merlon Texas, Inc., the First Court of Appeals in Houston held that oil which had been severed and stored in tanks on site was personal property and thus was transferred by an assignment of the oil and gas property on which the tanks were located. Merlon agreed to purchase oil and gas property owned by ERG pursuant to an “Assignment and Bill of Sale,” which stated that oil produced before January 1, 2008, and contained in the storage tanks on the land subject to the assignment “was the sole property of ERG.” After the assignment became effective, ERG submitted an invoice to Merlon for the value of the oil, which Merlon refused to pay. The court noted that the assignment expressly conveyed ERG’s “right, title, and interest in [the land], . . . inclusive, without limitation, the properties and/or oil and gas units located thereon, . . . together with . . . the personal property thereon, appurtenant thereto, or used or obtained in connection with said properties and/or oil and gas units.” (Emphasis by the court). The oil was personal property on the land as of the effective date of the assignment, and was thus conveyed to Merlon under the terms of the assignment.


To read the case, please go to http://www.1stcoa.courts.state.tx.us/opinions/PDFOpinion.asp?OpinionId=87174.
 

Fifth Circuit remands case regarding lessee's breach of a settlement agreement

By Jessica Gladney

The Fifth Circuit recently reversed the district court’s grant of partial summary judgment in Dore Energy Corp. v. Prospective Investment & Trading Co. Ltd., No. 08-30186 (5th Cir. 5/28/09). The dispute in Dore centers on the interpretation of a 2002 settlement agreement between the parties to certain mineral leases in Cameron Parish. Dore Energy Corp. filed suit in 2000 against the lessees of a 1927 mineral lease seeking to cancel underdeveloped portions of the lease. The parties reached a settlement agreement on January 28, 2002, in which the lessees agreed to release their interest in all of the mineral lease except for three specified sections of land, referred to as the “Retained Area.” The settlement agreement provided that three years after the agreement, the portions of the Retained Area that were not then in “producing units” would be released. The agreement also imposed an obligation on the parties to attempt to negotiate in good faith the size and extent of the producing units before instituting a proceeding before the Louisiana Commissioner of Conservation to settle any disputes.

On January 28th, 2005, only one of twenty-five existing wells in the Retained Area was still producing from the depth identified in its unit designated by the Commissioner of Conservation. In March 2005, Dore sent letters to the lessees demanding that they surrender the lease to all acreage other than that related to the one well producing at the unit designation depth. The lessees offered to negotiate with Dore regarding the shape and configuration around the wells, to include wells that had been recompleted into shallower zones than those specified in unit designations, but Dore instead filed suit in September 2005 seeking enforcement of the settlement agreement. The district court granted Dore partial summary judgment, finding that since only one well was producing at its unit designation depth and no voluntary units had been formed between 2002 and 2005, only one well in the Retained Area constituted a “producing unit.” The district court therefore canceled the lease on the rest of the Retained Area, effective January 28, 2005.

The Fifth Circuit determined the provision in the settlement agreement that required the parties to negotiate in good faith as to the size and extent of producing units before pursuing a determination from the Louisiana Commissioner of Conservation was not subject to the three-year time limit. Since no time limit for this provision was provided by the agreement, the obligation must be performed within a reasonable time. The Fifth Circuit remanded the case to the Western District of Louisiana for a determination as to whether the lessees breached the settlement agreement by failing to institute negotiations within a reasonable time. While recognizing that the agreement may have been breached, the court emphasized specific performance as a potential remedy and expressly stated, “The remedies available under Louisiana law and by these pleadings for such a breach do not include forfeiture.”
 

A premises owner can still be a statutory employer in Texas, at least for now

 By Andrew Wooley:

The Supreme Court of Texas issued a decision on rehearing in Entergy Gulf States, Inc. v. Summers April 3, 2009. The court’s original unanimous decision in August 2007 that a Texas premises owner can be a statutory employer for workers’ compensation purposes produced a great deal of political heat and a flurry of amicus briefs; so much so that the court departed from its normal practice and entertained oral argument on the motion for rehearing.

On rehearing, three justices joined in the opinion of the court; three justices concurred in different parts of the court’s opinion (two of them writing separate concurring opinions), and three justices dissented from the court’s decision and opinion. The court’s holding, however, did not change. 

In this workers’ compensation case, we decide whether a premises owner that contracts for the performance of work on its premises, and provides workers’ compensation insurance to the contractor’s employees pursuant to that contract, is entitled to the benefit of the exclusive remedy defense generally afforded only to employers by the Texas Workers’ Compensation Act. . . . We hold that the exclusive remedy defense for qualifying general contractors is, likewise, available to premises owners who meet the Act’s definition of “general contractor,” and who also provide workers’ compensation insurance to lower-tier subcontractors’ employees. Because we conclude that Entergy Gulf States, Inc. meets the definition of “general contractor” under the Act, and . . . otherwise qualifies under the Act . . . it is entitled to the exclusive remedy defense against the negligence claims brought by . . . John Summers [a subcontractor’s employee]. We reverse the court of appeals’ judgment and render judgment for Entergy.

The opinion of the court and the concurring and dissenting opinions are available on the court’s web site at http://www.supreme.courts.state.tx.us/historical/040309.asp. They are also available on Westlaw at 2009 WL 884906.

A bill has been introduced in the Texas legislature to “fix” the court’s decision in Entergy, however, so premises owners are well advised to monitor the progress of Texas Senate Bill No. 2063 (http://www.legis.state.tx.us/tlodocs/81R/billtext/pdf/SB02063I.pdf) before deciding whether to revise their insurance programs and forms of agreement with maintenance, construction, and other contractors in light of the decision in Entergy.

Texas Supreme Court Decides Miesch Case

By Everard Marseglia:

Last Friday, the Supreme Court of Texas issued decisions in two companion cases, No. 05-1076; Exxon Corp., et al. v. Emerald Oil & Gas Co., et al. (“Miesch”), and No. 05-0729; Exxon Corp., et al. v. Emerald Oil & Gas Co. (“Emerald”). Butch Marseglia, counsel in Liskow & Lewis’s Houston office, submitted a brief for the Texas Oil & Gas Association (“TxOGA”) as amicus curiae.

 

In Emerald, the Court held that Section 85.321 of the Texas Natural Resources Code creates a private cause of action, but it does not extend to a subsequent lessee against a prior lessee for damages to the subsequent lessee’s interest. Because the plaintiff Emerald owned no interest in the mineral leases when the prior lessee allegedly damaged the interest, the plaintiff lacked standing to assert the cause of action the Court recognizes under section 85.321. The Court also held that Emerald also lacked standing to bring a claim against its prior lessee based on negligence per se.

 

In Miesch, the Court held that statutory and common law waste, negligence per se, negligent misrepresentation, and tortious interference claims against the former lessee were time-barred. The Court also held that no evidence supported the lessors’; claim for breach of development claims under the oil and gas lease. Finally, the court affirmed the court of appeals’ judgment, for different reasons, reversing the trial court’s directed verdict with respect to fraud claims based on allegedly misrepresentation in Railroad Commission plugging reports filed by the former lessee, and remanded that claim to the trial court for further proceedings.

Click here for a link to the Miesch decision.

Click here for a link to the Emerald decision.

Texas Court of Appeals Affirms Lease Termination and Rejects Summary Judgment on Adverse Possession Claim

By Marie Carlisle

In Sun-Key Oil Co., Inc. v. Ernest Cannon & Moncrief Minerals P’ship, L.P., the Eleventh Court of Appeals in Eastland affirmed the District Court’s judgment granting summary judgment in favor of a lessor’s lease termination claim based on cessation of production and denying Sun-Key Oil Company’s motion for summary judgment on its affirmative defense of adverse possession stating that Sun-Key had failed to present detailed evidence establishing its use of the property and the elements of its adverse possession claims. The Court of Appeals referenced the Texas Supreme Court’s decision in Natural Gas Pipeline Co. of Am. V. Pool, 941 S.W.2d 910 (Tex. 1997), in stating the standard for summary judgment evidence regarding issues related to adverse possession.

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Location Matters in Purchasing Real Property

By Natalie Barletta

In Retamco Operating, Inc. v. Republic Drilling Co., the Texas Supreme Court holds that Republic Drilling, a California company, established minimum contacts with Texas by acting as the transferee of certain oil and gas interests. Retamco Operating sued Paradigm Oil in a Texas district court over unpaid oil and gas royalties. The trial court entered a $16 million default judgment against Paradigm. While the litigation was pending, however, Paradigm assigned to Republic certain oil and gas interests located in Texas. Retamco sued Republic for violating the Uniform Fraudulent Transfer Act (UFTA), arguing that the transfers from Paradigm were fraudulent and led to Paradigm’s insolvency and subsequent inability to satisfy the judgment. Republic filed a special appearance, arguing that it was not subject to personal jurisdiction in Texas. The Supreme Court held that Republic established minimum contacts with Texas when it purposefully availed itself of the privileges of conducting business in Texas and because Republic’s alleged liability arose from those contacts.

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Elections to Participate in Proposed Operations are Non-Revocable

By Kevin Connolly

On an issue of apparent national first impression, the Houston Court of Appeals, in XTO Energy Inc. v. Smith Production Inc., 14-07-0069-CV, 2009 WL 442003 at *1 (Tex. App.—Houston [14th] 2009, no pet. h.), held that once a party to a Joint Operating Agreement (“JOA”) timely and properly provides notice to a proposing party as to whether it elects to participate in the cost of a proposed operation, then that party may not change its election, even if it seeks to do so within the thirty day election period and regardless of whether the other parties have materially changed their positions in reliance on the initial selection.  The Court reached this holding based on the wording of the applicable JOAs, which were both based on the American Association of Petroleum Landmen Model Form Operating Agreement 610-1982.

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Fifth Circuit Recognizes Gas Purchaser's Right to Cancel Contract Due to Title Dispute

By Sarah Steward-Lindsey

In Flint Hill Resources, LP v. JAG Energy, Inc., No. 08-20152, ___ F.3d ___, 2009 WL 336129 (5th Cir. Feb. 12, 2009), a panel of the United State Court of Appeals for the Fifth Circuit heard an action arising from a contract to supply natural gas condensate in south Texas. Flint Hills, a crude oil refiner, agreed to purchase Mexican condensate from JAG. In 2006, Flint Hills received information that PMI/Pemex had been experiencing thefts of condensate. Fearing criminal liability if the condensate received from JAG was stolen from PMI/Pemex, Flint Hills informed JAG that they refused to accept further deliveries. Two days later, Flint Hills clarified that it was suspending payments until JAG could provide evidence that the condensate was purchased from PMI/Pemex at some downstream point. JAG identified two of its immediate suppliers and promised to forward documents showing that PMI/Pemex was the first link in its supplier chain, but never did so. Flint Hills cancelled the agreement and JAG brought a contract action alleging breach. The district court determined that Flint Hills had acted unreasonably in suspending payment and awarded JAG damages for breach of contract. Reversing the district court, the Fifth Circuit panel noted that Flint Hills could suspend payment under the terms of the agreement upon any “dispute or lack of information affecting” title. The right to suspend payment was not conditioned on the presence of an adverse claim or objective evidence of wrongdoing. In addition, the contract provided unconditionally that JAG agreed to furnish evidence of title to Flint Hills if requested. Because Flint Hills was entitled to request evidence of title and suspend payment until the lack of information was resolved to its satisfaction, the district court “improperly imposed extra-contractual requirements of commercial reasonableness and verifiable proof.” The verdict of the district court was reversed and a take nothing judgment rendered in favor of Flint Hills.


http://www.ca5.uscourts.gov/opinions%5Cpub%5C08/08-20152-CV0.wpd.pdf

U.S. Supreme Court Declines to Enforce Arbitration Provision Setting Forth Grounds for Judicial Review of Arbitration Award

In Hall Street Associates, LLC v. Mattel, Inc., 2008 WL 762537 (U.S. 2008), the Supreme Court held that the grounds for vacatur and modification of arbitration awards provided by §§ 10 and 11 of the Federal Arbitration Act (“FAA”) are exclusive.  Continue Reading...

Preferential Rights Decision From Texas Courts

By Jana Grauberger
and Anna Knull

In Navasota Resources, L.P. v. First Source Texas, Inc., No. 10-06-00236-CV, 2008 WL 90444 (Tex. App.-Waco Jan. 9, 2008), the issue presented was whether the preferential right in a Joint Operating Agreement was triggered when working interests subject to the JOA were to be sold along with other interests not subject to the agreement.  In this case, First Source, a working interest owner under a JOA, sought to sell to Chesapeake Energy Corp. a portion of its working interest under the JOA along with stock and interest in an AMI, both of which were unrelated to the JOA.  First Source notified Navasota, the other working interest owner under the JOA, of its intent to sell a portion of its working interest, and Navasota opted to exercise its preferential right to purchase First Source's working interest that was up for sale.  First Source rejected Navasota's offer on the ground that Navasota had only offered to purchase the working interest, and not the stock or interest in the AMI, reasoning that Navasota was required to accept the exact terms of the deal as offered to Chesapeake.  Navasota sued, claiming breach of contract and requesting specific performance.  The trial court granted Chesapeake's motions for summary judgment, and the appellate court reversed in favor of Navasota, holding: (1) Navasota's preferential right to purchase First Source's working interest was triggered even though the interest was to be sold along with interests not subject to the JOA, (2) Navasota was required only to comply with the terms of the sale relating to the working interest being conveyed, and not the additional terms of the sale relating to the stock and the AMI, (3) a binding contract for sale between Navasota and First Source was created when Navasota notified First Source that is was exercising its preferential right to purchase the working interest under the terms of the sale as offered to Chesapeake, (4) the preferential right provision of the JOA did not place an unreasonable restraint on alienation, and (5) that Navasota had established its right to specific performance of the contract for sale of First Source's working interest under the terms offered to Chesapeake.

Res Judicata Bars Relitigation of 1938 Buras Levee District Lease's Validity

      On November 21, 2007, the Louisiana Fourth Circuit Court of Appeal affirmed the trial court’s ruling in favor of Chevron U.S.A., Inc. (“Chevron”), the Plaquemines Parish Government (“PPG”), and others in a dispute with the State of Louisiana over the validity of a 1938 mineral lease granted by the Buras Levee District (“BLD”). The State of Louisiana had previously created the BLD and transferred to it all lands belonging to the State within its geographic borders, including the tract involved in the instant matter (Tract 1). In 1975, the BLD merged and consolidated with the PPG. The State of Louisiana asserted, among other arguments, that the merger and consolidation of the BLD with the PPG constituted an impermissible alienation of state minerals and that the State was entitled to the mineral revenues attributable to Tract 1 as an unleased owner. Faced with competing claims for royalty payments from the PPG and State of Louisiana, Chevron, as sublessee of the 1938 BLD lease, filed a petition for concursus and deposited royalty payments into the court registry.

            Ultimately, the Fourth Circuit affirmed the trial court’s finding that the State’s claims were barred by res judicata. Previously, in 1990, Chevron had filed a concursus to seek a resolution of competing claims made by the PPG and the State of Louisiana as to royalties applicable to a separate tract covered by the 1938 BLD Lease, Tract 87. In that prior litigation, the Louisiana Fourth Circuit affirmed a judgment in favor of PPG, finding that the 1938 BLD Lease was valid. 

            Here, the Fourth Circuit found that the instant case was barred by the doctrine of res judicata, since the present action concerning Tract 1 arose out of the same transaction or occurrence as the litigation concerning Tract 87. The court observed that the 1938 BLD Lease’s validity had been recognized by courts since 1943. Further, the real “cause of action” for res judicata purposes in both the Tract 87 litigation and the instant case was the immovable known as the 1938 BLD Lease, not any single tract of land contained therein. The court concluded that “[t]his is exactly the type of case to which res judicata applies” and “[t]o find otherwise would permit the State to file a series of separate actions challenging the ownership of mineral rights in each and every tract contained in the 1938 BLD Lease.”  Chevron U.S.A., Inc. v. State of Louisiana, et al., No. 2007-CA-0673, pp. 7-8 (La. App. 4th Cir. 11/21/07).    

Court of Appeal Rejects Plaintiff's Fraud Claim

In Martin v. JKD Investmens, LLC, the Court of Appeal of Louisiana, Second Circuit, rejected a plaintiff's fraud claim because the plaintiff had failed to read the contract that he signed which transferred the mineral rights on his property to JKD Investments, LLC ("JKD"). 

Click here to read more. 

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Texas Supreme Court decides Superior Snubbing - upholds effect of indemnity provisions in Master Service Agreement

By Andrew Wooley:

Supreme Court of Texas decides Superior Snubbing: In a case of substantial importance to the energy industry, the Supreme Court of Texas held that an oilfield service contractor sued by an injured employee of another contractor is entitled to enforce the indemnity provision in a Master Service Agreement between the operator and the contractor whose employee was injured.

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Fifth Circuit Considers Conditional Consent Issue in Cedyco v. Petroquest

By Anna Knull:

In Cedyco Corp. v. Petroquest Energy LLC, No. 05-20493, the Fifth Circuit considered claims for breach of contract and specific performance brought under Texas law and arising from the sale of the working interest in two Louisiana oil wells at auction. The wells were sold under the condition that PetroQuest would not sell or assign the mineral rights without first obtaining the written consent of Exxon, from whom PetroQuest had subleased the interest. Exxon granted consent conditioned on PetroQuest remaining obligated for the original sublease and indemnifying Exxon for any liability arising from Ceydco's operation of the lease. PetroQuest refused to complete the sale to Ceydco under these terms, and Ceydco sued PetroQuest for breach of the contract for sale and specific performance. In reversing summary judgment in favor of Ceydco, the Fifth Circuit held that though a contract for the sale of the wells had been formed, the contract contained a condition precedent that Exxon consent to the assignment. Because PetroQuest was not obligated to accept Exxon's terms, Exxon's conditional consent was not consent under the contract; consequently, PetroQuest's obligation to perform under the contract never came due.

Fifth Circuit Rejects Takings Claim

In Haspel & Davis Milling & Planting Co., Ltd. v. Board of Commissioners of the Orleans Levee District, the United States Court of Appeals for the Fifth Circuit reversed a grant of summary judgment in favor of plaintiffs on a takings claim.  In 1984, the Louisiana Legislature ordered the Levee Board to return land expropriated to build the Bohemia Spillway to its former owners and to provide them with an accounting of all revenues received from the property.   After the Levee Board failed to pay the landowners the mineral royalties that it had received on the affected property, the plaintiffs sued, arguing that the Levee Board's continued collection of and failure to return royalties was an unconstitutional taking.  After 12 years of litigation, the parties entered a settlement agreement that provided that the Levee Board would pay one lump sum to plaintiffs and then pay further as money was appropriated for that purpose.  After the Levee Board failed to pay further, the plaintiffs filed suit in federal court in June 2006, arguing that the Levee Board's failure to pay the terms of the settlement agreement was an unconstitutional taking.   The district court agreed.  The Fifth Circuit reversed, holding that because the landowners entered a "Settlement Agreement, the landowners compromised their takings claim against the Levee Board, and thus, extinguished any takings claim they may have had."  Therefore, "the landowners' only recourse is to enforce their rights under the Settlement Agreement and Consent Judgment."  To read the full opinion, click here

Louisiana Allows Recordation of Memorandum of Mineral Lease

By Collette Ross

The Louisiana legislature has amended Louisiana Revised Statute § 44:104(E) to allow a notice of a mineral lease to be recorded for public records purposes instead of the full lease.  Filing a memorandum or extract of a mineral lease was formerly permitted by Louisiana Revised Statute § 9:2721.1, but that section was repealed on July 1, 2006.  The current legislation resolves this problem. As to mineral leases, in addition to other requirements under § 44:104, the notice shall include the primary term of the lease and any additional period during which the lease may be maintained by the payment of rentals. The amendment of § 44:104(E) took effect on June 18, 2007.  Click here to view the Act amending this statute.

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Texas Court Subjects Override to Non-Consent Penalties

By Marie Carlisle:

Boldrick v. BTA Oil Producers, No. 11-06-00029-CV, 2007 WL 865811 (Tex. App.—Eastland March 22, 2007). 

The Eleventh Court of Appeals of Texas recently affirmed a District Court ruling granting summary judgment to BTA Oil Producers (BTA) on the basis that that the joint operating agreement (JOA), which governed the assignment of an overriding royalty interest to Plaintiff/Appellant, specifically provided guidelines for payments owed on an overriding royalty interest created by a non-consenting party. As BTA’s actions were consistent with the JOA, the court upheld the decision that no funds are due to Boldrick until the non-consent penalty provisions of the JOA are fully recouped and BTA itself receives payment for production from the well at issue.

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