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Today a district court in Travis County held that the Texas Railroad Commission violated the Administrative Procedure Act by informally adopting rules for issuance of allocation and production sharing well permits without following the rule-making procedures of the Act. The Court ruled in an appeal by a mineral owner of the Commission’s order granting a well permit to Magnolia Oil & Gas Operating for a well in Karnes County.

The case is Opiela v. Railroad Commission of Texas, No. D-1-GN-20-000099, in the 53rd District Court of Travis County. Judge Karin Crump’s order can be viewed here. Opiela v. RRC Final Judgment (003) Our firm represents the Opielas in the case.

Magnolia’s well, the Audioslave 1H, was originally permitted by Enervest as an allocation well. The Opielas protested the permit, and while the protest was pending the Commission issued the permit and Enervest drilled the well. Magnolia then took over operation of the well and filed an application for an amended permit for the well as a production-sharing well. That permit was also granted over the Opielas’ protest, and Magnolia fracked and completed the well.

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Two unusual cases have recently been decided by the El Paso Court of Appeals, both arising out of the same underlying facts. Both deal with a tax foreclosure on royalty interests.

In the late 1990s an attorney and two mineral buyers got together and proposed to taxing districts to handle tax foreclosure suits for delinquent taxes on royalty interests. The tax foreclosures named a large set of defendants who were served by posting notice of the suit at the courthouse. Texas law allows notice of suit by posting or publication where the plaintiff has tried diligently to locate the defendant and has been unable to do so. The two mineral buyers, Joe Hughes and Duke Edwards, searched the tax records for owners with delinquent taxes, and the lawyer proposed to represent the taxing districts in foreclosing the tax liens. The lawyer’s fee was paid out of the proceeds from the sheriff sale of the royalty interests foreclosed on. Hughes and Edwards were hired to try to locate the delinquent royalty owners so they could be served with the tax suit. For those they could not locate, they provided testimony in the foreclosure suit that they diligently looked for the missing owners and were unable to find them, so the court would authorize service by posting. Hughes and Edwards received an “abstractor’s fee” for each “unlocatable” owner for whom they searched. At the sheriff sale, Duke and Edwards bid on and purchased some of the royalty interests sold.

In Mitchell v. Map Resources, No. 08-17-00155-CV, the El Paso Court of Appeals addressed an appeal of a suit by the Mitchells seeking to set aside a 1999 judgment for taxes and the sale of their interest in royalties. The case resulted in three opinions: the majority opinion by Justice Gina Palafox, a concurring opinion by Justice Alley, and a dissenting opinion by Justice Rodriguez. The court refused to set aside the sale.

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Link here to Texas Tribune article. Not a good idea. ERCOT definitely made some mistakes in the freeze, but it had no authority to require generators to winterize.  Everyone is still pointing the finger at everyone else. Another Texas Tribune article: the legislature is now considering creating a $2 billion taxpayer-funded account for those improvements.

 

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Last week the Texas Supreme Court issued a per curiam opinion, without oral argument, reversing the judgment of the El Paso Court of Appeals  in Sundown Energy LP v. HJSA No. 3 Limited Partnership, No. 19-10654. The lease at issue covers 30,450 acres in Ward County. The case is another illustration of how parties fail to clearly express their intent in drafting retained acreage clauses.

The lease provides that, after the end of its six-year primary term, the lessee must release acreage not held by production unless the lessee was engaged in a “continuous drilling program:”

The obligation . . . to reassign tracts not held by production shall be delayed for so long as Lessee is engaged in a continuous drilling program on that part of the Leased Premises outside of the Producing Areas. The first such continuous development well shall be spudded-in on or before the sixth anniversary of the Effective Date, with no more than 120 days to elapse between completion or abandonment of operations on one well and commencement of drilling operations on the next ensuing well.

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Top-TenOn March 12 the Texas Supreme Court issued its opinion in BlueStone Natural Resources II, LLC v. Walker Murray Randle, No. 19-0459, affirming most of the judgment of the court below in favor of the royalty owners. The Court’s opinion contains a summary and discussion of its prior cases on post-production costs and attempts to reconcile those prior opinions and clarify its views on the issue. I believe the opinion does provide clarification and substantially reduces the precedential value of its first case addressing post-production costs, Heritage v. Nationsbank. The Court also discusses when royalties must be paid on gas used as fuel. Because I consider this an important case on post-production costs, I will examine the opinion in some detail. Continue reading →

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A colleague recently pointed out to me that I had miss-read the Texas Supreme Court’s recent opinion in Endeavor Energy Resources v. Energen Resources Corporation. In my previous post on the case I said that the Court had concluded that the retained acreage clause being construed was ambiguous and had remanded the case for a trial on the meaning of the clause. Instead, the Court concluded that, because the clause was ambiguous, it should be construed in favor of the lessee, Endeavor.

The retained acreage clause in Endeavor’s lease allowed the lessee to retain all interest in the leased premises if, after the primary term, it drilled a new well every 150 days. The clause also allowed Top-TenEndeavor to “accumulate unused days in any 150-day term … in order to extend the next allowed 150-day term between the completion of one well and the drilling of a subsequent well.” If and when the lessee failed to do so, the lease will terminate except as to specified acreage earned by wells then completed and producing. The dispute was over the meaning of the quoted language. Endeavor argued that the language allowed it to carry forward unused days across multiple 150-day terms; or alternatively, Endeavor argued that the language is ambiguous and that “the disputed language may not operate as a special limitation.” The Court concluded that the clause was indeed ambiguous and, because it operates as a “special limitation” on the lessee’s title, it should be construed in favor of the lessee.

[I]t has long been the rule that contractual language will not be held to automatically terminate the leasehold estate unless that “language … can be given no other reasonable construction than one which works such a result.” Knight, 188 S.W.2d at 566 (citing Decker, 216 S.W. 38). As explained above, the Lease’s description of the drilling schedule required to avoid termination is ambiguous under these circumstances. Courts should not treat an obligation so “lacking in definiteness and certainty as introducing” into a lease a “limitation[] leading to …termination of [a] vested estate[].” W.T. Waggoner Estate, 19 S.W.2d at 31. Because the disputed provision is ambiguous, it cannot operate as a special limitation under these circumstances.

In other words, the tie goes to the lessee. Continue reading →

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Governmental entities in Texas like school districts, municipalities, hospital districts, and counties rely heavily on property taxes to finance their operations. Mineral interests are real property interests, and when a producing well is drilled the owners of rights to production from the well, both the working interest and the royalty owners, are subject to being levied a property tax on the value of their interests. When those property taxes are not paid, the taxing districts can file suit to foreclose their tax lien securing payment of the tax.

It has become the practice of some taxing districts to hire private law firms to file tax suits to collect taxes. Multiple small delinquent tax accounts are combined into one suit. The attorneys handling the case charge a flat fee per account to handle the matter and are responsible for trying to locate and serve the defendants with the lawsuit. In many cases, the delinquent taxes go back years and the taxing authorities have no current address for the royalty owners. So many named defendants are served by publication notice in a local newspaper or posting notice at the county courthouse. If the defendants do not answer, a default judgment is entered and the sheriff of the county is ordered to sell the royalty interests at a public sale.

Mitchell v. Map Resources, Inc. involves such a delinquent tax sale. In 1998, the Pecos-Barstow-Toyah Independent School District and the Reeves County Hospital District filed suit to foreclose Top-Tentax liens against a some 673 defendants for delinquent taxes on royalty interests. One of the named defendants was Elizabeth Mitchell. The taxing authorities’ lawyers filed an affidavit seeking the court’s permission to serve the named defendants by posting, saying that each defendants is “either nonresident(s) of the State of Texas, absent from the state or transient,” and that “the names or residences of the owner or owners of the land or lots involved in said suit … are unknown and cannot be ascertained after diligent inquiry ….” Based on that affidavit, the court authorized service of the suit on the defendants by posting notice of the suit at the Reeves County courthouse. The court appointed an attorney ad litem to represent the defendants served by posting who had not appeared or answered. Continue reading →

Contact Information
John McFarland
 Graves, Dougherty, Hearon & Moody, P.C.
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Phone: 512-480-5618
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