By Mary Ellis LaGarde

Chesapeake is appealing a 2014 ruling by a San Antonio appeals court that upheld a decision by a state district court awarding at least $1 million to a Fort Worth family. The Hyder family argued that its lease with Chesapeake was heavily negotiated and specifically tailored to be “cost-free,” but Chesapeake has altered its interpretation of its obligations, attempting to deduct post-production costs.

The case is being closely watched by the oil and gas industry in Texas. The National Association of Royalty Owners-Texas and the Texas Land and Mineral Owners Association are backing the Hyders, saying that this case is one of many in which Chesapeake has sought to improperly deduct costs from royalty payments.

Observers say that the impact of the case will depend on whether the high court addresses its previous ruling in Heritage Resources v. NationsBank, which permitted the deduction of post-production costs even when contracts appear to disallow it. The Hyder lease included a provision stating that the findings in the Heritage case do not apply. The Fourth Court of Appeals in San Antonio agreed that the contract provision served to modify the general rule set forth in the Heritage case.

Gregory D. Jordan is an Oil and Gas lawyer in Austin. To learn more, visit http://www.theaustintriallawyer.com or call 512-419-0684.

The state high court’s 5-4 decision in Chesapeake Exploration, LLC v. Hyder clarifies when post-production costs may be exempted from overriding royalty interests. The court stated that generally, an overriding royalty on production of gas and oil is not burdened by production costs, but must carry a share of post-production costs, unless there is an agreement that states otherwise. The court stated that the only question to be decided in the lawsuit was whether there was an agreement allocating post-production costs, and the court concluded that there was.

The Texas Supreme Court agreed with San Antonio’s Fourth Court of Appeals, which in turn had sided with a court in Tarrant County, Texas, which awarded the Hyder family about $1 million.

In the Hyder case, the state high court revisited its 1996 ruling in Heritage Resources Inc. v. NationsBank. Before Hyder, the default rule had been that royalty interests were subject to post-production costs, which may include taxes and expenses for transportation and treatment. While case law recognized that post-production costs could be allocated by agreement, the court’s ruling in Heritage Resources made it difficult in practice. The “default rule” that post-production costs may be charged to royalty owners has now been significantly weakened.

Gregory D. Jordan is an Oil and Gas lawyer in Austin. To learn more, visit http://www.theaustintriallawyer.com or call 512-419-0684.

In Phillips v. Carlton Energy Group, LLC, Carlton sued entrepreneur Gene Phillips and other entities, alleging tortious interference with the company’s attempt to invest in an unproven methane exploration project in Bulgaria. Carlton sought the lost “market value” of its interest in the venture, and an expert witness testified that the fair market value of the investment ranged from $12.54 million to $11.305 billion, under three different models of damages. The jury found for Carlton and awarded actual damages of $66.5 million and exemplary damages of $8.5 million.

The First District Court of Appeals in Houston upheld the jury’s award on appeal. However, the Texas Supreme Court unanimously reversed the damages award, ruling that there was no evidence that the amount was based on objective facts from which the amount of lost profits could be determined. The court stated that while the requirement of “reasonable certainty” clearly applies when the damages sought are the lost profits themselves, it had not previously made clear that the standard also applies when lost profits are used instead to ascertain the market value of property. However, the court ruled that the reasonable certainty standard “clearly must” apply in such a case as well.

Gregory D. Jordan is an Austin business attorney and business litigation lawyer. To learn more, visit http://www.theaustintriallawyer.com or call 512-419-0684.

The case revolves around partnership status between companies. The courts who have tried it already have had to decide whether conduct that may have indicated a partnership (to build a pipeline) trumps a written agreement that allegedly precluded a partnership.

Energy Transfer Partners (ETP) alleged that it formed a legal partnership with Enterprise Product Partners in 2011 to jointly build an oil and gas pipeline. Enterprise then allegedly broke off the partnership to pursue similar plans with Enbridge Inc. 

ETP sued Enterprise and Enbridge, alleging tortious interference. ETP also alleged breach of contract and breach of fiduciary duties against Enterprise. Enterprise denied the allegations and argued that no partnership had been formed; the companies had not received approval from their boards for any joint venture.

A jury issued its $319 million verdict against Enterprise after a five-week trial and less than two days of deliberations. The jury rejected the claim of tortious interference against Enbridge.

An attorney representing Enterprise said that the company will move for a new trial, and that if the motion is not granted, Enterprise will appeal.

Observers said that the appeal is expected to be expensive for both sides because of the number of legal issues under consideration. The final ruling will most likely establish whether companies have a “safe zone” to explore business opportunities without inadvertently entering into a partnership or other legal commitment. 

With so much at stake, an attorney for Enbridge said he expects the case to reach the Texas Supreme Court.

Gregory D. Jordan is an Austin Oil and Gas lawyer. To learn more, visit http://www.theaustintriallawyer.com or call 512-419-0684.

Charles Hooks III’s land lease required Samson Lone Star LP to pay him if it drilled a well within one quarter-mile of his property. He sued the company when he discovered that a well that began 1,500 feet away actually bottomed out within the buffer zone. Hooks claimed that Samson lied about the nature of the well and altered plans to cover it up.

In 2008, a trial court awarded Hooks’ family (he was, by then, deceased) over $21 million in royalties. But in 2011, an appellate court overturned the award and ruled that if Hooks had exercised due diligence, he would have discovered the well’s true location more than five years before he filed suit. 

The statute of limitations for such fraud claims is four years.

In response, the Hooks family argued that because Samson allegedly misrepresented the oil well’s location, they should be permitted more time to bring their claims. Their case has moved to the state Supreme Court in part to consider that claim.

The Hooks family has stated that the issue at stake is one of the most important in Texas oil and gas law – balancing the right of defendants to be protected from very old claims while preserving the ability of fraud victims to seek legal remedies.

If you have any doubts about your oil and gas lease, speak with an attorney sooner rather than later.

By Richard LaGarde

The royalty owners accuse Exxon of falsely informing them that the productivity of their wells was diminishing. This allegedly caused them to sell the oil and gas interests to a different buyer for less than their true value.

The dispute has been in litigation since 1996, having already reached the Texas Supreme Court in 2009 on different issues.

The royalty owners claim that they relied on false statements by Exxon about the value of the wells when they sold the leases to another company at a reduced rate. According to the royalty owners, Exxon claimed that the wells had only two years of production left, when in reality, they had 12. When the royalty owners refused to accept less than the 50 percent royalty rate they had previously received, Exxon canceled its leases. According to court records, the royalty owners later sold their interests to another party for a 30 percent royalty rate.

Exxon argues that because the royalty owners denied Exxon’s statements about the diminished productivity of the wells, the statements could not have influenced their later decision to sell to another company at a lower price.

The royalty owners argue that Exxon is raising new arguments at too late a stage in the litigation. Furthermore, they claim, the company is relying on evidence that was not originally presented to the trial court, including evidence supporting the argument that Exxon’s representations were only opinions — and therefore should not have been relied upon by the royalty owners.

Gregory D. Jordan is an Oil and Gas lawyer in Austin. To learn more, visit http://www.theaustintriallawyer.com or call 512-419-0684.

The owners allege that they were misled into selling their gas and oil interests for a reduced price; the company argues that the royalty owners should not get a new trial after a previous appeal resulted in the loss of a $21 million judgment in their favor.

The royalty owners claim that Exxon misrepresented the productivity of their wells, leading the owners to believe they were worth less than they were, which in turn influenced their decision to sell their interests to a different company at a reduced price. Exxon argues that the owners’ decision could not have been affected by Exxon’s representations, because the owners repeatedly denied that the wells were losing value.

Exxon’s brief claims that the royalty owners did not justifiably rely on the company’s representations, because they “distrusted everything” the company said and conducted their own investigation, ultimately rejecting Exxon’s suggestion that the leases should be modified.

The underlying dispute began in 1996, when royalty owners sued Exxon, claiming that the company was sabotaging Refugio County wells by plugging them with foreign material. According to the lawsuit, Exxon attempted to negotiate a lower rate on the leases by claiming that productivity was diminishing. When the owners refused to accept less than a 50 percent royalty rate, Exxon terminated the leases. The owners later leased to Emerald Oil and Gas for a 30 percent royalty rate, according to court records.

The fraud claims were dismissed prior to trial, with the trial court finding no evidence that the royalty owners relied on Exxon’s statements. The other claims (for breach of contract and waste) resulted in a $21 million verdict in 1999. But after a series of appeals, the Texas Supreme Court reversed that verdict in 2009.

However, because the appeals court did not address the issue of whether the fraud claims were dismissed improperly, the Texas Supreme Court remanded the case for review of that issue. The lower appeals court then found that the fraud claims were improperly dismissed and sent the case to the trial court for a new trial.

Exxon now argues that the Texas Supreme Court should step in again and reverse the order for a new trial.

According to Exxon’s brief, the appeals court perceived an attempt at fraudulent inducement in Exxon’s statements which, even though they were rejected at the time, were nevertheless relied upon later, in separate negotiations with a different party.

The law, Exxon said, should not go that far.

For a concise case summary and further detail, click here.

Gregory D. Jordan is an Oil and Gas lawyer in Austin. To learn more, visit http://www.theaustintriallawyer.com or call 512-419-0684.

The royalty owners claim that Exxon misrepresented the facts regarding the productivity of their wells in an attempt to negotiate a different royalty rate. After the royalty owners refused to accept less than a 50 percent rate, Exxon terminated the drilling contracts. Later, the owners negotiated a separate deal with a different company for a 30 percent royalty rate. The leaseholders claim that their reliance on alleged misrepresentations by Exxon led them to accept a bad deal.

Exxon’s brief to the Texas Supreme Court claims that the owners could not have relied on Exxon’s statements because they “distrusted everything” the company said. Instead, the owners conducted an investigation of their own which led them to reject Exxon’s offer of a lower royalty rate, according to the company’s brief.

The original dispute began in 1996, when the royalty owners sued Exxon, claiming the company had sabotaged Refugio County wells to create the appearance of reduced productivity in an attempt to negotiate more advantageous lease terms. The owners won a $21 million verdict on breach of contract and waste claims, but the fraud claim was dismissed before trial.

The Texas Supreme Court later reversed the breach of contract and waste verdict, but remanded the fraud claims to a lower appeals court, which found that they were improperly dismissed and granted a new trial. Exxon is now asking the high court to step in again and reverse the order for a new trial.

Gregory D. Jordan is an Oil and Gas lawyer in Austin. To learn more, visit http://www.theaustintriallawyer.com or call 512-419-0684.

In the 2008 Garza case, the Texas Supreme Court overturned a verdict awarding millions of dollars to Hidalgo County landowners who claimed that hydraulic fracturing on neighboring property had caused drainage of their underground minerals to an adjacent well. The Texas high court ruled that the rule of capture applied, protecting drillers from such claims as long as they followed the law and did not, for instance, drill a slanted well underneath neighboring property.

Some legal observers have argued that in cases of hydraulic fracturing, also known as “fracking,” drainage is nearly inevitable and the rule of capture should not apply. The Texas Supreme Court said in the Garza case that the remedy for landowners worried about drainage is to dig their own well. Some landowners have said that this is not always practical.

Texas law prohibits drilling close to a neighbor’s property line, but drillers may apply to the Railroad Commission of Texas, which regulates drilling, for what is known as a Rule 37 exception. According to an analysis by the Texas Tech Law Review, such exceptions can result in drillers capturing hydrocarbons from underneath adjacent property, with landowners receiving no compensation.

Despite criticism of the rule of capture, landowners should be aware that it is still the law in Texas.

Gregory D. Jordan is an Oil and Gas lawyer in Austin. To learn more, visit http://www.theaustintriallawyer.com or call 512-419-0684.