MINERAL LAW

FALL 2009

Exxon Corporation v. Miesch, W.L. 795668; LEXIS 113 (Tex. 2009)

Duty to Plug Well, Statute of Limitations, Fraudulent Concealment, Waste, Negligence, Tortious Interference, Fraud in Filing Plugging Reports: The royalty owner sued the prior lessee for alleged wrongful conduct in development and abandonment of two oil and gas tracts. The Court of Appeals opinion was discussed at length in the Spring 2006 Mineral Law section of the General Practice Section Digest, which should be reviewed for the particular facts and claims. In general, the case involved an unusually high royalty lease, which eventually became unprofitable and after being unable to resolve the matter, Exxon plugged the wells. Royalty owners received a jury verdict of $45M in actual damages and $10M in punitive damages as a result of Exxon allegedly plugging the wells in a nonstandard plugging procedure and leaving junk in the well bore, which would delay recompletion of the well and increase reentry expenses. Held: The two-year statute of limitations applied to the claims for statutory and common law waste, negligence, and tortious interference. Although the royalty owners argued that the statute of limitations was tolled under the doctrine of fraudulent concealment or the accrual of the claims deferred because of the discovery rule, the Supreme Court held, based upon the royalty owners’ actual knowledge of facts underlying their breach and waste claims, these claims were time-barred. The breach of the lease, based upon language requiring Exxon to comply with development clauses, was denied based on the Court’s finding that the evidence completely proved Exxon had complied with the development requirements in the lease. Because the statute of limitations for fraud was four years, the fraud claim, based on misrepresentation of material information in the plugging reports, was found to be timely, and the fraud claim was remanded to the trial court for further proceedings.

Exxon Corporation v. Emerald Oil & Gas Co., L.C., W.L. 745668; LEXIS 114 (Tex. 2009)

Texas Natural Resources Code Section 85.321, Private Cause of Action for Damages, Duty to Plug Well Properly, Standing of Subsequent Lessee: This case involved the same facts referred to in the immediately preceding case but was by the subsequent mineral lessee of the land suing the prior lessee, Exxon Corp., for breach of statutory duty to plug a well properly and breach of statutory duty not to commit waste under Texas Natural Resources Code § 85.321 and other statutory provisions. Held: § 85.321 did create a private cause of action, but that did not necessarily give a subsequent lessee standing to bring suit for violation of the statute. A cause of action for injury to real property accrued when the injury was committed and the right to sue was a personal right that belonged to the person who owned the property at that time and did not pass to a subsequent purchaser of the property unless there was an express assignment of that cause of action. Therefore, absent a conveyance of the cause of action, a subsequent owner could not sue a prior owner for injury to real property that occurred before the subsequent owner acquired his interest. The Court noted that a holding to the contrary would make any party who held a mineral interest indefinitely liable to all subsequent interest holders for prior alleged damage to the land, which would greatly expand the class of potential claimants beyond that allowed by common law and the statute.

Retamco Operating, Inc. v. Republic Drilling Co., 278 S.W.3d 333 (Tex. 2009)

Fraudulent Transfer, Special Appearance, Texas Uniform Fraudulent Transfer Act: Retamco sued Paradigm over unpaid royalties relating to oil and gas interests in Texas. Following an interlocutory judgment again Paradigm, Retamco sued Republic for violation of the Texas Uniform Fraudulent Transfer Act because Paradigm had transferred to Republic a 72% interest in options in Texas leases, leading to Paradigm’s insolvency. Held: Under constitutional due process, personal jurisdiction was obtained when (1) a nonresident dependent had established minimum contacts with the forum state, and (2) the assertion of jurisdiction complied with “traditional notions of fair play and substantial justice.” A defendant established minimum contacts with the state when it “purposefully availed itself of the privilege of conducting activities within the forum state, thus invoking the benefits and protections of its laws.” Here the oil and gas interests were located in Texas; Republic purposely took assignment of Texas real property. Purchase and ownership of real property could “involve many contacts over a long period of time and contain certain obligations, i.e., valuation and tax issues, etc. Republic was a willing participant in a transaction with an affiliated Texas company to purchase Texas mineral interests in real property, and Republic sought a “benefit, advantage, or profit” in Texas. In addition, Republic was alleged to receive transfer of real property from a Texas resident during the pendency of a Texas suit for the purpose of defrauding a Texas resident whose contacts were held to be sufficient to demonstrate that the alleged tort occurred, at least in part, in Texas. Republic had therefore established minimum contacts with Texas, and the assertion of jurisdiction over Republic did not offend traditional notice of fair play and substantial justice.

Kohout v. City of Fort Worth, W.L. 1650098; LEXIS 4216 (Tex. App.Fort Worth 2009)

Drilling Permit within City Limits, Standing: Fort Worth amended its city ordinances in 2006 to regulate gas well drilling and production within the city and requiring a permit. A high-impact gas well permit was required for any gas well located within 600 feet of a protected use, i.e., a residence, religious institution, public building, hospital building, school, or public park. Kohout’s suit was against the City and two gas well and gas drilling inspectors because a high-impact well permit was granted allowing drilling of a gas well within 600 feet of a hiking and bike path along the Trinity River. Held: Her claims were denied based on lack of standing to object to the permit under the particular facts which are set out in the opinion.

Vortt Exploration Co. v. EOG Res., Inc., W.L. 1522661; LEXIS 4113 (Tex. App.Eastland 2009) (memo op.)

Oil and Gas Lease Termination, Cessation of Production, Shut-In Royalty Provision, Adverse Possession, Injunction: In 1980, Vortt obtained an oil and gas lease from Green with a 2-year primary term. In 1981, a gas well was completed in a pool within the unit in which the property was located. In 2001, the gas purchaser disconnected its pipeline to that well. In 2005, EOG sought to conduct geophysical operations on the property. Vortt, the original lessee, contended the lease had not terminated and filed suit against EOG and the mineral lessees who counterclaimed for wrongful issuance of a temporary restraining order and for a damages for breach of contract, fraud, and trespass. The trial court granted summary judgment in favor of the mineral owners since there had been no production from December 2001 until the lawsuit was filed in 2005. A force majeure clause in an oil and gas lease excused a lessee from nonperformance of obligations contained in the lease if the nonperformance was “caused by circumstances beyond the reasonable control of the lessee,” but even if that provision would apply, the well was not maintained in a position to produce and, production was not renewed and no shut-in payment of royalties were made within 90 days of the date a new pipeline became available. Held: Although the lease contained a shut-in well provision, the well must be capable of producing in paying quantities at the time it is shut-in, or the shut-in royalty clause will not extend the term of the lease. In order to be capable of producing in paying quantities when the well was turned on, it must flow “without additional equipment or repairs.” There was no necessary compressor on this well for some five or six years, so the well was not equipped to produce. Additionally, the summary judgment evidence conclusively showed that Vortt did not pay or tender the shut-in royalties in a timely manner. A claim of adverse possession by the original lessee was overruled. Adverse possession statutes required “an actual and visible appropriation of real property, commenced and continued under a claim of rights that was inconsistent with and was hostile to the claim of another person.” In this case, the lessor, by lease, granted a fee simple determinable and retained the possibility of reverter and right to receive royalties. So long as the lease was in effect, the lessee was the owner of the oil and gas in place and had the exclusive right to possess and produce the minerals. When the lease expired, the title in these exclusive rights reverted to the lessor, so that to establish ownership by adverse possession, the lessee must show that, after the lease’s expiration, the lessee adversely possessed the minerals. That proof was not satisfied by evidence of surface activities consistent with leasehold operations, but required proof of actual possession of the “minerals” by drilling or producing.

Aurora Petroleum, Inc., v. Newton, W.L. 1444099; LEXIS 3640 (Tex. App.Amarillo 2009)

Executive Rights, Duty to Nonexecutive Interest Owners: Newton owned all surface rights and all executive rights to the entire tract, along with an undivided one-fourth interest in the minerals. Newton refused to lease. Aurora negotiated a lease with other mineral interest owners and filed suit on behalf of all nonexecutive interest owners to force Newton to enter into a lease for oil and gas exploration on the property. After discussing the fiduciary duty owed to the nonexecutive mineral right owners as set out in Manges v. Guerra, 673 S.W.2d 180 (Tex. 1984), and the duty to develop set out in Hlavinka v. Hancock, 116 S.W.3d 412 (Tex. App.Corpus Christi 2003, pet denied), the court held that where there was no existing oil and gas lease, there was no implied duty to develop owed by the executive right holder to the nonexecutive right holder. In other words, until the executive owner executed a lease, there was no implied duty to develop owed to the nonexecutive mineral owner and the only duty owed to the nonexecutive mineral rights owner was to acquire the benefits for them that the executive right owner acquired for himself.

Derwen Res., LLC v. Carrizo Il & Gas, Inc., W.L. 6141597; LEXIS 3661 (Tex. App.Beaumont 2009) (memo op.)

Lease Interpretation, Rule of Last Antecedent, Mineral Reservation: This case involved the conveyance of undivided interest in land that was included to reaffirm that “the proper manner in which to make a reservation is to mention the existence in the granting clause and to set out the reservation itself after the description and prior to the habendum. Note: Texas law required that a reservation of minerals must be set out in clear language.

State v. BP Am. Prod. Co., W.L. 1255812; LEXIS 3145 (Tex. App.Austin 2009)

State Ownership of Riverbed, Trespass to Try Title, Public Taking Claim, Sovereign Immunity: BP held a deed to portions of the property which had been encroached upon by an adjacent river. The State claimed title to the property as State-owned submerged land and granted oil, gas, and mineral leases to Etoco. BP claimed that the encroachment of the river was due to subsidence caused by withdrawal of groundwater by nearby cities. The case primarily involved sovereign immunity and subject matter jurisdiction issues, but the court pointed out that one who took possession of another’s land without legal right was no less than a trespasser simply because he was a state official or employee. Therefore the landowner was not required to obtain legislative consent to institute a suit to oust them simply because of a good faith but over-zealous claim that title was in the State. Sovereign immunity would bar a landowner’s suit to recover possession of property if the sovereign was named as a party defendant, but not necessarily so if asserted against the officials or employees who were holding the property on the sovereign’s behalf. Note: The case was lengthy and complex and should be read in detail if actions are to be asserted against the State or its officials with regard to title or possession or claims of mineral interests.

Averitt v. Caudle, W.L. 891034; LEXIS 2284 (Tex. App.Eastland 2009) (memo op.)

Ad Valorem Tax on Mineral Interests: The mineral owner filed suit to appeal the Appraisal Review Board’s value of his oil and gas interests. The oil and gas interests were admittedly not supposed to be appraised at a value greater than the market value. The opinion sets out in detail several portions of the charge, which appear to be more complex than the market value definition used generally.

In re Marriage of Fillingim, W.L. 765394; LEXIS 2014 (Tex. App.Amarillo 2009) (memo op.)

Division of Mineral Interests in Divorce: The husband’s parents deeded him four mineral interests during the marriage. Both husband and wife executed mineral leases to others. Their subsequent divorce decree did not specifically mention the mineral interests but contained a residual clause providing that each party was entitled to a one-half interest in any property not specifically listed in the decree. Held: Therefore, notwithstanding the prohibition of a court awarding separate property of one spouse to another, the appellate court held that the separate mineral interests of husband were divided one-half to husband and one-half to spouse in accordance with the general residuary clause.

Headington Oil Co., L.P. v. White, W.L. 783338; LEXIS 1984 (Tex. App.Houston [14^th Dist.] 2009)

Unpaid Royalties, Prejudgment Interest, Attorneys’ Fees, Title Dispute: In a suit for unpaid royalties, under §91.402(b), Texas Natural Resources Code, no prejudgment interest was owed on unpaid royalties where there was a dispute concerning the title or interests involved that would or could affect the distribution of payments. The court also approved the award of attorneys’ fees under §91.406 of the Texas Natural Resources Code since there was a final judgment in favor of plaintiff and the necessity of determining who were the “prevailing parties” was not the standard to be applied.

Sun-Kay Oil Co. V. Cannon, W.L. 626071; LEXIS 1646 (Tex. App.Eastland 2009) (memo op.)

Lease Termination, Cessation of Production, Adverse Possession: This case primarily dealt with summary judgment proof required to prove lease termination by reason of cessation of production and cessation of production in paying quantities and for res judicata, collateral estoppel, and affirmative defenses of adverse possession.

Burnett Ranches, Ltd. V. Cano Petroleum, Inc., W.L. 619590; LEXIS 1674 (Tex. App.Amarillo 2009)

Oil and Gas Lease, Surface Damages: This was a suit against the oil and gas operator for negligence in failing to take reasonable measures to prevent fires and in failing to prevent fires from spreading to other ranch property. The lease provided that the oil company would pay all damages occasioned to the premises by any wilful act on the part of its servants or employees. The oil company contended that this restricted liability to damages arising solely from willful conduct. Held: Willful conduct required an act or omission resulting from conscious indifference to a right or welfare of others, while negligence was just the failure to act reasonably under the circumstances in present, so that negligence and willful conduct have been viewed as opposites of each other. The lease also provided that the lessee would exercise reasonable care to prevent damages to the grass and other property on the land. One contractual provision should not be interpreted in a way to nullify another under the lease. The lease expanded the oil company’s liability to damages arising from both negligence and willful acts rather than limiting the oil company’s liability to only willful acts.

XTO Energy Inc. v. Smith Prod., 282 S.W.3d 672 (Tex. App.Houston [14^th Dist.] 2009, pet. filed)

Joint Operating Agreement, Election Not to Participate: Under a joint operating agreement based on the AAPL Model Form Operating Agreement, Chevron contracted to sell certain oil and gas properties to XTO. Under the JOAs, the nonoperating interest owners had thirty days after receipt of notice in which to notify the operator as to whether they would elect to participate in the cost of proposed operation. Chevron first elected not to participate in the cost of four wells. However, within thirty days of Chevron’s receipt of the notices to drill the four wells, Chevron changed its mind and elected to participate in the cost of the four wells. Held: The court held that under JOAs, when a party timely and properly gave notice to the proposing party as to whether it elected to participate in the costs of the operation, then that party may not change its election even it sought to do so within the original thirty days after receipt of the notice of the proposed election. Once all parties have communicated their election regarding participation, the notice period expired.

United States v. Navajo Nation, 129 S. Ct. 1547 (2009)

Indian Lands: This case is cited only for its references to various governmental acts involving Indian lands in the event issues involving Indian lands are encountered.

DDD Exploration, Inc. v. Key Prod. Co., W.L. 1159154; LEXIS 36100 (U.S. Dist.Amarillo 2009)

Saltwater Injection, Limitations, Discovery Rule, Loss of Oil: The Texas Railroad Commission granted Key a permit to convert a well which was drilled as a dry hole to a saltwater disposal well, based on Key’s representation that the interval into which the saltwater was to be disposed was not productive of oil or gas. DDD drilled a well 300 feet away, which produced almost entirely water. DDD claimed that it’s well and the saltwater disposal well were in pressure communication and that the saltwater injected precluded DDD from recovering oil from its well and sought approximately $13M in damages. DDD claimed trespass, negligence, negligence per se, common law waste, and other statutory or administrative causes of action. Key sought a summary judgment based on the 2-year statute of limitations. DDD claimed that the injury was inherently undiscoverable, thereby tolling the statute of limitations. Held: Damage to a common reservoir was not in the category of claims where the discovery rule applied. Additionally, DDD did not act with reasonable diligence as required by the discovery rule and the injury was not objectively verifiable. All DDD’s claims were held untimely and dismissed.