On February 13, the Texas Supreme Court will hear arguments in a case involving important issues to the Texas oil and gas industry, including whether or not Texas recognizes an independent private cause of action for waste based on violations of Texas conservation laws and whether an oil and gas lessee commits waste by plugging abandoned wells with minerals remaining in the reservoir. The Court will also hear arguments on the applicability of the discovery rule and fraudulent concealment to claims by oil and gas lessors.

Liskow & Lewis attorney Butch Marseglia submitted an amicus curiae brief on behalf of The Texas Oil & Gas Association. For a copy of TxOGA’s brief, click on the following link Amicus Curiae Brief of TXOGA – Received: 10/16/2006 .

The Miesch case, set for argument on February 13, is one of two related cases decided by the Corpus Christi Court of Appeals last year.

A.   Emerald Oil & Gas v. Exxon Corp., No. 13-99-757, 2005 WL 167051 (Tex.App.—Corpus Christi Jan. 27, 2005, pet. filed No. 05-0729; Exxon Corporation and Exxon Texas, Inc. v. Emerald Oil & Gas Company, L.P., In the Supreme Court of Texas)

Emerald, a subsequent lessee of Exxon, sued Exxon for wrongful conduct “in the development and abandonment of oil and gas wells in the Mary Ellen O’Connor Field.” Specifically, Emerald asserted claims for (1) breach of regulatory duty to plug a well properly; (2) breach of regulatory duty to refrain from committing waste; (3) negligence per se based on alleged violations of various Natural Resources Code sections and Railroad Commission regulations; (4) tortious interference with economic opportunity; (5) fraud; and (6) negligent misrepresentation. The royalty owners intervened and asserted claims against Exxon for, among others, common law waste, statutory waste, negligence per se, tortious interference, and failure to develop. The trial court granted summary judgment for Exxon on Emerald’s first three claims and severed the remaining claims, and Emerald appealed the summary judgment. Emerald’s remaining claims were tried with those of the royalty owners (see next section).

The Corpus Christi court of appeals reversed the summary judgment and remanded the case to the trial court. Exxon’s Petition for Review was filed September 9, 2005, arguing that:

1.  Emerald lacks standing, as subsequent acquirer of the leases, absent an express assignment of specific causes of action;
2.  Natural Resources Code § 85.321 does not create any new private causes of action; and
3.  Violations of the Natural Resources Code do not support a claim of negligence per se.

For copies of the Supreme Court briefs currently on file in Emerald case, click on the following link http://www.supreme.courts.state.tx.us/ebriefs/files/20050729.htm.

B. Exxon Corp. v. Miesch, 180 S.W.3d 299 (Tex.App.—Corpus Christi 2005, pet. filed No. 05-1076; Exxon Corporation and Exxon Texas, Inc. v. Emerald Oil & Gas Company, L.P., and Laurie T. Miesch; In the Supreme Court of Texas)

Emerald’s remaining claims, along with those of the royalty owners, were tried to a Jury, but the court directed a verdict in favor of Exxon on Emerald’s claims. On the remaining claims, the Jury found in favor of the royalty owners on all issues submitted. Thus, at the end of the day, Emerald took nothing from Exxon, but the Jury found:

1. Exxon committed waste on “property or production” in which the royalty owners “owned an interest”; 2. Exxon failed to act as a reasonably prudent operator in plugging the wells;
3. The royalty owners discovered, or in the exercise of due diligence should have discovered, the waste on January 24, 1995;
4. Exxon failed to comply with the development provisions in the lease;
5. Exxon fraudulently concealed its failure to develop; and
6. In February 1999 the royalty owners knew, or in the exercise of reasonable diligence should have known, that Exxon fraudulently concealed its failure to develop.

The Jury awarded the royalty owners:

1. $5 million for (a) the cost to drill new wells, (b) the value of the minerals that could not be recovered, and (c) the loss of bonus payments;
2. $10 million in punitive damages; and
3. $3.6 million for Exxon’s breach of contract, as the amount the royalty owners “would have received for the minerals produced” had Exxon fully developed the leases, less (a) the costs of operation and production and (b) any royalty received from Emerald.

The Corpus Christi court of appeals affirmed the judgment in favor of the royalty owners and reversed the trial court’s directed verdict on Emerald’s causes of action for fraud, negligent misrepresentation, and tortious interference. Exxon’s Brief argues that:

1. A claim that an operator’s method of plugging an abandoned well made reentry to produce anr remaining hydrocarbons more difficult is not the type of claim to which the discovery rule applies;
2. The Discovery Rule, if applicable, cannot save the stale tort claims because the royalty owners and Emerald knew about facts giving rise to their claims;
3. The court of appeals’ “rescue” of the breach of lease coalm violates the Court’s fraudulent concealment precedent by suspending limitations until all the specifics of the claim are revealed;
4. The court of appeals’ holding regarding what constitutes evidence of fraudulent intent creates ad limitless class of plaintiffs to whom persons who file public records may be liable;
5. Without regard to limitations, the “waste” claim fails because tort liability may not be imposed when the allegedly wrongful conduct is the subject of the parties’ contract;
6. By upholding the waste claim, the court of appeals has created a new common law cause of action for waste, never before recognized in Texas oil and gas law;;
7. The court of appeals’ opinion creates a new statutory private cause of action for waste under section 85.321 of the Natural Resources Code;
8. Even if it were not time-barred, the breach of lease claim fails as a matter of law because Exxon complied with the express terms of the leases’ development clauses;
9. The definition of “waste” submitted to the Jury is fatally defectiv;
10. The court of appeals relied on legally insufficient evidence to uphold the multimillion dollar damages judgment; and
11. Even if not time-barred, Emerald’s negligent misrepresentation and tortious interference claims fail as a matter of law because no evidence supports critical elements of each claim.

For copies of the Supreme Court briefs currently on file in the Miesch case, click on the following link http://www.supreme.courts.state.tx.us/ebriefs/files/20051076.htm.