This bill, signed by the Governor, fixes a problem with the provisions of the Texas Business and Commerce Code that grant a security interest in oil and gas production and proceeds to secure the payor’s obligation to pay royalty owners. I have written about this problem before. Previous bankruptcy court decisions held that this provision did not protect royalty owners when the payor was a company not organized in Texas.
Provisions in oil and gas leases requiring the lessor’s consent to assignment of the lessee’s interest are common. A lessor may have reasonable concerns about assignment of the lease, especially if the lessor is also the owner of the surface estate of the leased premises. The lessor may have agreed to lease in part because of the reputation and financial condition of the lessee, and he or she may justifiably wish to have control over whether the lease can be assigned to a third party.
Lessees, on the other hand, dislike consent-to-assign provisions in leases. Such provisions may substantially impair the lessee’s perceived value of the leasehold estate it has paid for. Leases are bought and sold like commodities. In the Permian Basin last year, more than $25 billion of transactions took place transferring mineral leasehold interests. Those transactions are made more difficult when lessors’ consents must be obtained to close the transaction.
Before closing a deal to purchase a package of oil and gas leases, the buyer will review the terms of the leases, and included in that review will be identifying leases that require consent to assign. Typically such review will uncover consent-to-assign provisions, in which event the buyer will have to determine whether obtaining such consent will be a condition to closing the deal. In my experience, companies acquiring leases will typically divide the leases containing consent-to-assign provisions into two categories, those with “soft-consent” provisions and those with “hard-consent” provisions. A “hard-consent” provision specifies the consequences of failure to obtain consent — for example, that such a breach is grounds for cancelling the lease, or that specified liquidated damages must be paid for the breach. A “soft consent” is one that prohibits assignment without consent but does not specify a remedy for the breach. Companies may elect to acquire leases with soft-consent provisions without requiring the seller to obtain consent, based on the reasoning that the lessor will have to prove damages for the breach, that damages would be difficult to prove, and that the lessor probably will not sue for the breach. Without a specified remedy for breach in the lease, in particular a right to terminate for the breach, the reasoning is that termination of the lease for breach of the consent-to-assign provision would not be a remedy available to the lessor. The buyer will, however, require the seller to obtain consent for leases containing a hard-consent lease provision, especially if it specifies that breach of the provision would allow the lessor to terminate the lease.
On February 24, the Texas Supreme Court issued its opinion in ExxonMobil Corporation v. Lazy R Ranch, LP, et al., No. 15-0270. ExxonMobil v. Lazy R Ranch The 8-0 opinion was authored by Chief Justice Nathan Hecht. The case provides important reminders to landowners who have oil and gas operations on their property.
In 2008, Exxon sold its lease on the Lazy R Ranch, a 20,000-acre ranch near Monahans, where it had conducted operations for almost 60 years. The ranch owners hired an environmental engineer to investigate whether Exxon’s operations had caused contamination that should be remediated. The investigator found four sites with contamination and warned that the contamination could threaten groundwater. Exxon refused to remediate the sites, and the landowner sued.
The suit sought monetary damages for the contamination and injunctive relief to require Exxon to remediate the four contaminated sites. Exxon filed a summary judgment motion arguing that the claims were barred by limitations. The trial court granted Exxon’s motion. The 8th Court of Appeals reversed and remanded. Continue reading →
I have written before about landowners’ efforts to collect damages for personal injury and property damage caused by nearby oil and gas exploration operations on the theory that such activities cause a nuisance. Nuisance is a recognized tort claim. To recover, a person must prove that (1) the person has an interest in land (2) the defendant interfered with or invaded the person’s interest in the land by conduct that was negligent, intentional, or abnormal and out of place in its surroundings, (3) the defendant’s conduct resulted in a condition that substantially interfered with the person’s use and enjoyment of his land, and (4) the nuisance caused injury to the plaintiff.
In the case decided by the court of appeals in San Antonio, Cerny v. Marathon Oil, the Cernys bought an acre of land with a residence on it in 2002. In 2012, Marathon began drilling wells in the area. Plains Exploration and Production also constructed production facilities in the area. Eventually, there were 22 well sites within 1 1/2 mile of the Cernys’ home. The Cernys hired experts, who measured chemicals in the air around their home and near oil and gas production sites in the area. The experts included an air quality expert, a forensic meteorologist, and a toxicologist.
The Cernys sued Marathon and Plains, alleging that the fumes, odors and dust from their facilities caused physical health symptoms and made their home uninhabitable. Marathon asked the trial court to dismiss the case, on the ground that the Cernys had no evidence that their facilities were the “proximate cause” of the Cernys’ alleged damages.
The Texas Supreme Court has granted the plaintiffs’ petition to review a case important for Texas mineral owners, Hooks v. Samson Lone Star. I wrote about this case when it was decided by the Houston First Court of Appeals in 2011. The court of appeals’ opinion reversed a judgment for $21 million against Samson Lone Star in a case involving alleged bad-faith pooling and fraudulent misrepresentations by the Hooks’ lessee. The court of appeals threw out the judgment, holding that Texas Supreme Court precedent required it to hold that the Hooks’ claims were barred by the applicable statute of limitations.
The statute of limitations bars claims if they are not filed within four years (or two years for some claims) of the event that caused the damages or injury for which the claim is brought. In some cases, courts have excused the delay in filing claims if the damage or injury was not discovered until a later date. Under this “discovery rule,” the statute of limitation is “tolled” until the plaintiff discovered or, with reasonable diligence, should have discovered, her injury. Also, courts have held that the statute of limitations is tolled where the defendant fraudulently conceals the facts giving rise to the damage or injury.
Over the last several years, the Supreme Court has severely narrowed the circumstances under which plaintiffs can invoke the discovery rule or claim fraudulent concealment to toll limitations on a claim, particularly in suits by mineral owners against their lessees. In Exxon v. Emerald in 2009, the Supreme Court reversed an $18 million judgment against Exxon on the basis that the mineral owners’ claims were barred by limitations — despite an express finding by the jury that the plaintiffs had filed their claim within four years after they discovered or should have discovered Exxon’s fraudulent conduct. In 2011, the Supreme Court in BP v. Marshall overruled a jury verdict in favor of royalty owners, holding that their claim was barred by limitations as a matter of law even though the jury had found that the lessee had fraudulently concealed the facts and that the plaintiffs had no reason to discover the true facts until less than two years prior to filing suit.
There’s lots of buzz about a recent verdict in a case filed by a landowner in Dallas County alleging injuries from air emissions from drilling and production of Barnett Shale wells in Wise County. The case is Lisa Parr v. Aruba Petroleum, Cause No. 11-01650-E, in the County Court at Law No. 5 of Dallas County. The jury returned a verdict for personal injury and property damages of $2.9 million. According to the petition (Parr – 11th Amended Petition.pdf), Aruba had 22 wells within two miles of the Parrs’ 40 acres, including one within 800 feet.
CNN quotes the plaintiff, Lisa Parr, as saying that says she’s not opposed to the work oil companies do. She simply wants them to do their business responsibly.
“We are not anti-fracking or anti-drilling. My goodness, we live in Texas. Keep it in the pipes, and if you have a leak or spill, report it and be respectful to your neighbors. If you are going to put this stuff in close proximity to homes, be respectful and careful.”
The Texas Supreme Court has once again overturned a jury verdict in favor of royalty owners, finding “no evidence” to support the jury’s finding. The court’s opinion in the case, BP America Production Company, Atlantic Richfield Company and Vastar Resources, Inc. v. Stanley G. Marshall, Jr., et al., No. 09-0399, was issued last week. The case evidences the Court’s continued hostility to royalty owners’ claims of lease termination.
The important facts are as follows:
I always counsel my clients to provide in their oil and gas leases that they have the right to inspect and copy all documents of the lessee necessary to determine whether royalties have been paid correctly, and to audit the records of the lessee to confirm accurate payment of royalties. Royalty owners generally assume that the royalty payments they received have been calculated and paid as required by their leases. This is not always the case, as illustrated by a recent case, Shell Oil Company SWEPI LP v. Ross, 2010 WL 670549 (Tex.App.-Houston [1st Dist.], decided February 25, 2010. The case illustrates typical schemes used by producers to underpay royalty owners, and their efforts to prevent royalty owners from knowing how royalties are calculated and, when the royalty owners discover the underpayment, to prevent royalty owners from recovering the underpayment.
In Shell v. Ross, the trial court and Houston Court of Appeals held that Shell had underpaid royalties due to Ross. Shell has appealed to the Texas Supreme Court. The Texas Supreme Court refused to consider the case, but Shell has filed a motion for re hearing that is still pending. Other producers are very interested in the case: friend-of-the-court briefs have been filed by Chesapeake, Texas Oil & Gas Association, and the American Petroleum Institute asking the Court to reverse the Court of Appeals.
The facts of the case require some explanation but illustrate well the importance of verifying the correct calculation of royalties.
A case now before the Texas Supreme Court that addresses issues important to Texas mineral owners. The case, BP America Production Company, et al., v. Stanley G. Marshall, Jr., et al., No. 09-0399, asks the Texas Supreme Court to address the applicability of the laws of adverse possession to mineral interests for the first time since the Court’s decision in the Pool case, Natural Gas Pipeline Co. of America v. Pool, decided in 2003. To understand the importance of BP v. Marshall, it is necessary to first review the Pool case.
The recent volatility in prices for oil and gas leases has raised issues with the time-honored custom in the industry of paying lease bonuses with drafts. Problems have arisin because companies have refused to honor the drafts or because lessors have sought to cancel the transaction after signing and delivery the lease and lessor’s deposit of the draft. When someone wants to back out of “the deal” after a lease has been exchanged for a draft, the lessor and lessee run to their lawyers to find out what legal rights and obligations have been created by the exchange. No one is happy.
As I have written previously, it is generally my advice to avoid using drafts for payment of lease bonuses. My practice is to hold my client’s original signed lease until I receive a check for the bonus from the company, then send the check to my client and the lease to the company. I find that most companies are willing to close the deal in this manner.
But most lease transactions are consummated using a draft. So, herein is an additional discussion of problems arising from use of drafts..