Articles Posted in Recent Cases

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The Texas Supreme Court agreed to decide Hlavinka v. HSC Pipeline, about which I have written before. The Court’s summary of the issues:

The primary issues in this case are whether (1) Texas law grants eminent domain authority to a pipeline owner shipping polymer grade propylene; (2) a pipeline shipping a product from the pipeline owner’s sole manager to an unaffiliated customer constitutes a public use; and (3) the landowner may properly testify that the highest-and-best use of the taken land is as a pipeline corridor, and value the land through comparisons to past, private pipeline easement sales.

Both parties have appealed. The Hlavinkas argue that HSC does not have eminent domain authority. HSC says Hlavinka’s testimony on value should not have been admissible.

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I wrote about this case before. Today the Texas Supreme Court agreed to hear the plaintiff’s appeal of a judgment of the El Paso Court of Appeals. The Supreme Court’s summary of issues in the case:

At issue in this case is whether courts are barred from considering deed records in a collateral attack on a default judgment. A second issue is whether a rule that bars such evidence shields a default judgment from an otherwise meritorious due process claim. Other issues raised are whether a property owner’s due process rights were violated in obtaining the default judgment and whether the doctrine of laches or provisions in the Tax Code bar a collateral attack on the judgment.

The default judgment was for foreclosure of a tax lien after service by publication. The case has significant due process issues. In a lengthy concurrence in the El Paso court’s judgment, Justice Alley voiced his dissatisfaction with the extrinsic evidence rule but concurred because the court was bound by the Texas Supreme Court precedent. He noted that Ms. Mitchell’s address was in eight warranty deeds that were recorded before the tax suit was filed and could have been easily found.

 

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Pending before the Texas Supreme Court is the petition for review of Ammonite Oil & Gas Corporation challenging the decision of the San Antonio Court of Appeals in Ammonite Oil and Gas Corp v. Railroad Comm’n of Texas, 2021 WL 4976324 (Oct. 27, 2021). The Court of Appeals upheld the RRC’s decision to deny Ammonite’s sixteen applications to force-pool portions of the Frio River into pooled units created by EOG for its horizontal wells in the Eagleville (Eagle Ford-1) Field in McMullen County. The application presents several interesting issues regarding the scope and interpretation of the MIPA.

The State of Texas owns the land within Texas riverbeds. Ammonite leased the oil and gas in the Frio River from the Texas General Land Office. Ammonite then made an offer to EOG to pool adjacent portions of the riverbed into sixteen existing EOG units along the river. (click on image to enlarge)EOG-AmmoniteAmmonite offered to sign an operating agreement with EOG providing for Ammonite to pay its share of costs related to wells in the pooled unit, based on its share of the acreage in the unit. It also offered a 10% “risk penalty.” Ammonite would agree that EOG could recover 110% of its already-incurred costs for wells on the unit before Ammonite would receive its share of revenues from the wells.

EOG rejected Ammonite’s offers and did not make any counteroffer.

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Two recent decisions from two federal judges in the Southern District of Texas, Houston Division, dismissed suits alleging class actions against Apache and Hilcorp for failure to pay royalties on gas used in gas processing plants. Both construed identical lease provisions.

In Carl v. Hilcorp Energy, No. 4:21-CV-02133, Judge Keith Ellison construed a lease with the following provisions:

The royalties to be paid be Lessee are: … on gas, including casinghead gas or other gaseous substance, produced from said land and sold or used off the premises or in the manufacture of gasoline or other product therefrom, the market value at the well of one-eighth of the gas so sold or used ..

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Landowners are often faced with a conundrum: can they accept a royalty check if they believe it is in the wrong amount?

Ms. Strickhausen owns a half interest in the minerals under a tract of land in La Salle County. Her minerals are subject to a lease owned by BPX (then Petrohawk, subsequently acquired by BPX). Her lease expressly prohibits pooling without her consent. The lease of the other half interest in her tract permits pooling. (Ms. Strickhausen’s lease also prohibits commingling of production: “Commingling of production from the Leased Premises with production from other lands or leases shall be prohibited prrior to such accurate metering, measuring and testing, unless commingling is consented to, in writing, by Lessor and each royalty owner.”) BPX filed a pooled unit designation for the WK Unit 4 No. 1H Well and drilled a horizontal well located partly under Ms. Strickhausen’s tract and partly under other tracts. It then asked Ms. Strickhausen to ratify the pooled unit.

Ms. Strickhausen’s lawyer then engaged in a series of communications with BPX seeking to negotiate terms under which Ms. Strickhausen would agree to ratify the pooled unit. The attorney asked BPX how it would propose to pay Ms. Strickhausen if she refused to ratify the unit. BPX replied that it would pay her “based on the length of productive wellbore on the subject tract over the total length of productive wellbore.” BPX claimed that Ms. Strickhausen would receive a larger royalty interest in the well by ratifying the pooled unit than she would if she were paid on a productive-wellbore basis. BPX concluded by saying that, if Ms. Strickausen did not ratify the unit “the royalties will require being placed in suspense.” Continue reading →

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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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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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