12th Annual Energy Litigation Conference

Houston, Texas November 7, 2013

Energy Litigation Update 2013

Presentation at Conference by:

Patton G. Lochridge McGinnis, Lochridge, Kilgore L.L.P.

Austin, Texas

Paper Prepared by:

Mark D. Christiansen McAfee & Taft

Oklahoma City, Oklahoma

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Patton G. Lochridge

Pat Lochridge has a broad-based litigation practice with a strong emphasis on

energy litigation, including oil and gas class actions, royalty claims and operational disputes. In addition to his energy-related work, Pat has significant experience in technology, antitrust, professional malpractice and business disputes. He was managing partner of the firm from 2000 until 2010. Born in the Rio Grande Valley, Pat has litigated frequently and successfully from South Texas to Dallas, Houston, San Antonio and Austin. His oil and gas practice also takes him to Oklahoma, Kansas, Wyoming and Montana.

Pat was listed in Best Lawyers© as Lawyer of the Year in Oil & Gas Law – Austin in 2011 and Bet-the-Company Litigation – Austin in 2009. He has been listed in Best Lawyers in the fields of Bet-the-Company Litigation, Energy Law, Litigation – Intellectual Property, Natural Resources Law and Oil & Gas Law since 1993. He has been recognized as a "Top-Notch Lawyer" in energy law (2002) by Texas Lawyer. He was awarded the Austin Bar Association’s Distinguished Lawyer Award in 2012. Pat has been selected to the Texas Super Lawyers list, a Thomson Reuters service, (2003-2013).

Pat’s wide-ranging experience in energy litigation includes, among many other lawsuits:

Defending a major oil company in various class actions in Oklahoma and Kansas. Representing a royalty owner and obtaining a jury verdict and judgment against

an oil company in East Texas. Representing a major pipeline company in an insurance coverage case and

obtaining a verdict and judgment for client. Representing an independent oil and gas exploration company in a case involving

misappropriation of confidential information. Pat obtained a verdict and judgment for the client in Webb County.

Representing a South Texas family against a major oil company on a royalty

claim in Duval County. Successfully defending various major oil companies in royalty and environmental

litigation across Texas.

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Mark D. Christiansen

Mark Christiansen is the Co-Leader of the Energy and Oil & Gas Industry Group in the law firm of McAfee & Taft, and practices in the firm’s Oklahoma City office. His practice involves the representation of oil and gas producers, purchasers and other sectors of the energy industry primarily in litigation matters and in certain transactional matters. Mark serves on the Board of Trustees, and on the Executive Committee, for the Dallas-based Center for American and International Law. He is has also served this year on the Board of Directors for the Board of Trustees, and as Treasurer, for the Denver-based Rocky Mountain Mineral Law Foundation.

Since 1997, he has been listed in Best Lawyers in America under the practice areas of Natural Resources and Energy Law. Since the inaugural listings of Oklahoma lawyers in these two publications, Mark has been listed in Oklahoma Super Lawyers on the list of the Top 50 lawyers in the State of Oklahoma and on the list of top attorneys in the area of Energy and Natural Resources Law, and in the Chambers USA Directory's listing of leading Oklahoma attorneys in the area of Energy and Natural Resources Law. Since 1996, Mark has been a member of the Board of Editors for The Oil and Gas Reporter (Matthew Bender/Lexis). He served as the Chair of the Energy and Natural Resources Litigation Committee of the ABA Section of Environment, Energy, and Resources (SEER) from 2001–2003. From 1985 to the present, Mark has served as lead editor and co-author of annual reports of legal developments in the United States in the area of energy law for the Year in Review publication of the ABA SEER. He is lead editor for a similar "energy litigation update" published each Summer in the Rocky Mountain Mineral Law Foundation Journal. Some of Mark’s other publications include: Author of Chapter titled "Oil and Gas Royalty Class Action Lawsuits," in the ABA Tort Trial & Insurance Practice Section's Book titled A Practitioner's Guide to Class Actions (2010 – 2013); "The Top Ten Recent Court Decisions Challenging the Oil and Gas Industry," 58 Oil & Gas Instit. Chapt. 4, at 87 (2007); Co-Author, "A Different 'Slant' on JOAs," 57 Rocky Mountain Mineral Law Institute 25 (2012); "Class Actions Pushed to the Extreme--Will Class Action Plaintiff Lawyers Be Permitted to Re-Zone Our Courts for Tract Housing?” 24 Journal of Land, Resources and Environmental Law 77 (2004); “A Landman’s Guide to Drafting Provisions for the Allocation of Gas Marketing-Related Costs Under the Oil and Gas Lease,” 45 Rocky Mountain Mineral Law Institute 21 (1999); “A Comparison of the Model Form Gas Balancing Agreements - Catching Up With a Changing Market Environment,” 40 Rocky Mountain Mineral Law Institute 16 (1994); and Co-Author, “COPAS for Landmen and Lawyers,” 48 Rocky Mountain Mineral Law Institute (2002).

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Table of Contents

Page

I. Non-Operator v. Operator, Gas Balancing, and Other Oil and Gas Operations-Related Cases

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II. Royalty Owner Litigation

17

III. Oil and Gas Lease Cancellation, Termination and Breach of Obligation Cases (Other than Royalty)

29

IV. Oil and Gas Contracts, Transactions and Title Matters

38

V. Marketing and Refining of Oil and Gas Production

63

VI. Surface Use, Surface Damages, Condemnation and Environmental Cases

68

VII. Suits Over International Energy Operations

73

VIII. Other Energy Industry Cases

82 - 92

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I. Non-Operator v. Operator and Other Oil and Gas Operations-Related Cases

A. Court rejects assertion that non-operator informally agreed to extend

the effectiveness of an expired participation agreement.

In 2001 Trinity Fund, LLC v. Carrizo Oil & Gas, Inc.,1 an operator (Carrizo) and a non-operator (Trinity) signed an agreement setting out the terms and conditions of the non-operator’s participation in wells drilled on certain prospects. The agreement provided that if Trinity did not pay its share of the drilling and casing costs for the first well on the Blair-Pickering Prospect on or before October 19, 2007, the participation agreement would automatically terminate. It was undisputed that Trinity did not make that payment, so the agreement automatically terminated at the end of the day on October 19, 2007.

Thereafter, the two parties exchanged a series of emails. Carrizo asserted that

the emails constituted a written agreement by Carrizo and Trinity to continue forward under the terms of the participation agreement (a) except that the termination provision associated with the non-payment of costs for the first well on the Blair-Pickering Prospect was not part of the extended contract, and (b) except that the agreement included a new provision under which Trinity would receive a 1% rebate.

Carrizo alleged that Trinity breached the alleged agreement by not paying any of the costs for any of the Commitment Wells. Carrizo sued Trinity for, among other things, breach of contract, quantum meruit and promissory estoppel. The jury found that the companies had in fact agreed in writing to continue forward under the terminated participation agreement under the terms asserted by Carrizo, and it awarded damages. On appeal, the Texas Court of Appeals held in part as follows: 1. With respect to the breach of contract claim, the court found that, under the unambiguous language of the emails, there was no mutual understanding and assent by Carrizo and Trinity to a written agreement to continue forward under the participation agreement. Since the payment required to keep the agreement in effect was not paid, the participation agreement terminated on October 19, 2007. Carrizo was thereafter relieved of its obligation to assign Trinity any interest in the Commitment Wells, and Trinity had no further obligation to pay any costs under the terminated agreement. 393 S.W.3d at 451. 2. In response to Carrizo’s contention that the issue of whether the parties

1 393 S.W.3d 442 (Tex. App. – Houston 2012).

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agreed to the alleged extension agreement was a fact question for the jury whose determination should not be disturbed on appeal, the court found that the negotiations, alleged offers and alleged acceptances were in writing and the language used was unambiguous. As a result, the issue of whether the parties agreed to the alleged extension agreement was a question of law for the court. 393 S.W.3d at 453. 3. With regard to Carrizo’s quantum meruit claim (alleging that Carrizo rendered valuable services or furnished materials for Trinity), because of the termination of the participation agreement, Trinity held no interest in the prospects or leases that benefitted from the costs Carrizo sought to recover. Consequently, this claim failed. 4. Finally, Carrizo’s promissory estoppel claim first focused on select statements made prior to the execution of the participation agreement. The court noted, however, that the participation agreement expressly stated that “[t]his instrument contains the final and entire agreement of [Carrizo and Trinity] with respect to the matters covered by this Agreement and supersedes all prior communications and agreements (written, oral or otherwise) in this regard.” Consequently, the statements relied upon by Carrizo could not provide evidence to support a promissory estoppel claim by virtue of the parol evidence rule and the integration clause of the participation agreement. 5. Carrizo’s promissory estoppel claim was also based on certain statements made after the participation agreement terminated. However, the court found that the statements were too vague and indefinite to constitute a promise that would support a finding of promissory estoppel.

B. Court Determines Whether Future-Acquired Oil and Gas Leases Were Subject to JOA Entered Into Over 30 Years Earlier.

In Clovelly Oil Co., LLC v. Midstates Petroleum Co., LLC,2 the dispositive question was whether an oil and gas lease acquired by Midstates in 2008 was subject to the terms and provisions of the pre-existing operating agreement (JOA). The JOA was entered into in 1972, and Clovelly was the current operator. Midstates was a non-operator. The JOA was a 1956 AAPL Form 610 model form operating agreement. In 2008, Midstates acquired a new oil and gas lease covering lands that were included within the unit area described in the JOA. In April 2009, Midstates re-entered an abandoned well and started preparing locations for other abandoned wells on the new lease. Clovelly promptly notified Midstates that its lease acquisition and its operations were subject to the provisions of the JOA. Clovelly asserted that it was entitled to its proportionate share of the new lease and that it had the right to operate the new wells. When Midstates disagreed, Clovelly sued for breach of contract and

2 112 So.3d 187, 2012 - 2055 (La. 2013).

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declaratory judgment. The trial court granted partial summary judgment in favor of Midstates declaring that the JOA did not apply to the new lease that had been acquired some 35 years after the date of the JOA.

Clovelly appealed. The Court of Appeals reversed and held that the JOA did apply to the new lease. The Louisiana Supreme Court granted discretionary review.

After reviewing the provisions of the JOA in detail, the Louisiana Supreme Court

concluded that the JOA applied “to leases and unleased mineral interests located within the geographic area described in Exhibit ‘A,’ which were owned by the parties at the time the JOA was executed.”3 In reaching this conclusion, the court made the following observations, among others:

1. It found that the Court of Appeals (which had ruled that the JOA applied to

new leases) ignored the present tense language of the preamble of the JOA as well as the present tense wording in Section 1(4). The Preamble refers to leases and unleased mineral interests in the subject lands of which parties to the JOA “are owners.” Section 1(4) defines “oil and gas interests” as “unleased fee and mineral interests in tracts of land lying within the Unit Area which are owned by the parties.

2. The court distinguished the prior decision of the Kansas Supreme Court in

Amoco Production Co. v. Charles B. Wilson, Jr., Inc.,4 in which that court rejected Amoco’s argument that the use of the present tense word “are” in the Whereas clause of the Preamble limited the JOA to leases that were in effect at the time the JOA was executed. The Louisiana court found that even where a contract contains both preprinted and handwritten or typed terms, the contract must still be interpreted as a whole, and with an effort to give effect to, and harmonize, all provisions of the agreement. It distinguished the Kansas decision that relied on certain language the parties had inserted in the Exhibit A to their JOA, and the court noted that the Kansas court stated that it was not holding that all after-acquired leases were covered by the JOA. The Louisiana court also noted that the Kansas decision was influenced by the presence of fiduciary duties imposed on parties to a joint venture.

3. The Louisiana Supreme Court further found that to hold that future leases

in the unit area are subject to the JOA would also render Section 23 of the JOA virtually without effect. Section 23 is the provision that allows the parties to choose whether to participate in renewal or extension leases. Even if the point were to be made that Section 23 applies to “extension and renewal” leases but not to “new” leases, the court found that would be an unusual outcome because it would mean that the parties would have the “option” whether to participate in the types of leases that would be more familiar to the parties, but that “new future” leases, with which they have less familiarity,

3 112 So.3d at 193. 4 976 P.2d 1941 (Kan. 1999).

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would automatically be subject to the JOA. The court noted in footnote 35 of its opinion that the American Association of

Professional Landmen had filed an amicus brief in support of Midstates assertion that the new leases were not covered by the JOA.

C. North Dakota Supreme Court upholds the operator’s refusal to provide well information to a participating non-operator unless the non-operator first signed an agreement to keep the data confidential.

In the North Dakota Supreme Court’s decision in Come Big or Stay Home, LLC v. EOG Resources, Inc.,5 the court addressed the Plaintiff non-operator’s claims against EOG, as operator, for refusing to provide the non-operator with oil and gas well data unless the plaintiff/non-operator first agreed to keep the information confidential and to not disclose it to any third parties without EOG’s prior consent. The underlying facts involved EOG’s proposal to the plaintiff, as a co-working interest owner in the subject property, to participate in the drilling of a new horizontal well. The proposal advised plaintiff that if it accepted the proposal and elected to participate, a joint operating agreement (“JOA”) would be sent for the plaintiff’s execution. The plaintiff elected to participate in the proposed well and bear its proportionate share of the well costs. EOG subsequently forwarded for the plaintiff’s execution a JOA based upon the AAPL Form 610-1982 Model Form which included a special provision requiring that the non-operators agreed not to disclose any information relating to the drilling or completion operations to any third party without the express written consent of the Operator “which may be withheld at the Operator’s sole discretion,” except that the operator agreed to allow disclosure to the extent required for any SEC filings or if required by court order. The plaintiff signed and returned the JOA to EOG. During the months that followed, EOG sent plaintiff 18 additional invitations to participate in the drilling of horizontal wells in North Dakota, following the same format and substance as the proposal described above. The plaintiff agreed to participate in each well and received from EOG separate JOAs that mirrored the provisions of the JOA the plaintiff had signed for the first well. However, the plaintiff refused to sign any of the JOAs for the subsequent wells due to its objection to the confidentiality provisions that were included in those JOAs.6 Because of the plaintiff’s refusal to agree to the confidentiality restrictions, EOG refused to provide the plaintiff with well information relating to the last 18 wells in which plaintiff had elected to participate.

5 2012 ND 92, 816 N.W.2d 80. 6 The plaintiff advised that it would have likewise refused to sign the JOA submitted by EOG on the first well if plaintiff had noticed that a non-disclosure provision had been added to the special provisions.

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The plaintiff sued EOG seeking damages under various theories for EOG’s failure to provide the well information on the last 18 wells. EOG moved for summary judgment. The district court granted EOG’s motion and the plaintiff appealed. In affirming the ruling of the district court, the North Dakota Supreme Court first addressed the plaintiff’s argument that since the 18 JOAs were not signed, the court should enforce the elections to participate in the wells by implying reasonable terms. The plaintiff asserted that “reasonable terms” would include terms that reflect custom and usage in the oil and gas industry, such as the right of a non-operator to receive well information without having to first sign a confidentiality agreement giving the operator control over whether such data can be disclosed. The plaintiff emphasized that, unlike large oil and gas companies who have large inhouse staffs, small independent oil and gas companies often need to disclose their well data to outside consultants such as engineers and geologists. The court, however, found that by virtue of the inclusion of a confidentiality provision in the first JOA that the plaintiff had signed, knowledge was imputed to the plaintiff that EOG would not provide it with well information unless it agreed to keep it confidential. The court observed that custom and usage does not override the express intent of the parties to a contract, and that it would be improper to allow the plaintiff to impose contract terms “through the guise of usage or custom” that the plaintiff knew to be completely contrary to EOG’s intent. The plaintiff additionally argued that the district court’s refusal to compel EOG to provide the well information resulted in a situation in which EOG could overcharge or underpay the non-operator because EOG would not be required to provide the information needed to assess whether the operator was fulfilling its duties. The court, however, noted that EOG was not disputing the plaintiff’s right to receive the information, but was instead only challenging the plaintiff’s right to disclose the information to third parties. The court concluded that, because there was no provision in the contract between EOG and the plaintiff that allowed plaintiff to unrestricted access to well information, EOG’s failure to provide the information could not be a breach of contract. Plaintiff next argued that EOG breached a fiduciary duty that it owed to the plaintiff by virtue of their status as joint venturers and cotenants. The court found that EOG and the plaintiff were neither joint ventures nor contentants. Moreover, the court observed that any fiduciary duty that might be owed under any viable theory would be of a scope determined by the parties’ agreement. Since the agreement in this case did not require EOG to provide the well information without imposing confidentiality restrictions, the plaintiff could not establish a breach of fiduciary duty in this case. Finally, the plaintiff asserted that the district court erred in dismissing its

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conversion claim against EOG. However, since the court found that the plaintiff had failed to establish any source of entitlement to the well information (finding that neither a contract, fiduciary duty nor North Dakota statutes and rules gave plaintiff such a right), there could be no claim for conversion against EOG.

D. Court addresses dispute over the intended termination date for special AMI provision in JOA.

In Ballard v. Devon Energy Production Co., L.P.,7 the Fifth Circuit reviewed a decision by the U.S. District Court for the Southern District of Texas8 that granted summary judgment in favor of Devon in a dispute over the provisions of a joint operating agreement JOA (“JOA”) and related Area of Mutual Interest (“AMI”) agreement. Under the factual background of this case, Ballard’s and Devon’s predecessors signed a Farmout Agreement on May 31, 1971. The Farmout Agreement memorialized a joint venture for the drilling of shallow oil wells under oil and gas leases that covered 230,040 acres in Montana. The Farmout Agreement included a JOA as an exhibit. The JOA included a multi-paragraph AMI provision which stated in part as follows in its 5th grammatical paragraph:

“31.F. Area of Mutual Interest: “The above subparagraph of 31F shall be effective from the date of the Farmout Agreement to which this Operating Agreement is attached and shall terminate and be of no further force and effect after three years from the date of this operating agreement.” [Emphasis added]

It was undisputed that the above subparagraph “of” 31F expired on May 31, 1974 because the JOA was dated May 31, 1971. However, Devon asserted that the entire AMI provision in 31F had expired, while Ballard asserted that only the 4th grammatical paragraph of 31F had expired. The 4th grammatical paragraph dealt with the surrender of leases and the failure to maintain leases. In 2005, over 30 years after the Farmout Agreement had been signed by the predecessors in interest, Ballard sued Devon for failing to offer him the opportunity to participate in various recent acquisitions in the AMI, contending that most of the provisions of paragraph 31F remained in force and effect. The district court concluded as a matter of Montana law that “the only practical interpretation of the phrase ‘the above subparagraph of 31 F’ confirms that the preposition ‘of’ was a typographical error and that the parties unambiguously intended for the three-year limitation to apply to the

7 678 F.3d 360 (5th Cir. 2012). 8 Ballard v. Devon Energy Production Company, L.P., 2010 WL 2521391 (S.D. Tex. 2010).

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entirety of 31.F.”9 The court based its summary judgment ruling on extrinsic evidence regarding the intent of the parties. The district court also found that since Ballard knew as early as 1976 that the AMI provision had expired, his delay in bringing the suit prejudiced Devon, such that his claims were barred by laches. Ballard appealed. The Fifth Circuit found that the district court incorrectly relied on extrinsic evidence without first assessing the wording of the contract to determine if it is ambiguous or whether the intent of the parties can be ascertained from the writing alone. In undertaking that task, the court noted the following considerations, among others: 1. The Farmout Agreement and its incorporated exhibits showed that the initial phase of the parties’ venture contemplated the drilling of 20 wells during the primary term of the leases, which the court noted was likely “three years” for each lease. 2. The court found that while the first three paragraphs of 31F addressed the possible acquisition of new leases on previously unleased lands within the large AMI, the 4th paragraph of 31F was the “flip side of the AMI coin” because it addressed the surrender of oil and gas leases within the ten township AMI. The 4th grammatical paragraph provided that a party would lose its future AMI rights as to an entire township if it surrendered or failed to maintain its oil and gas leases covering property in that particular township.10 3. The court further found that the intent of the parties was to have the acquisition provisions and the surrender provision of the AMI section remain in effect for the same time period. It found that the termination of one without the termination of the other made no sense. The court concluded that when it focused on the fifth grammatical paragraph of 31F in the context of the contract as a whole, it was apparent that (1) the language of the contract was unambiguous, (2) the three-year expiration applied to the entirety of 31F, and (3) a review of the transaction as documented in the contract led to only one reasonable conclusion regarding the original parties’ intent concerning the AMI provision.11 It affirmed the decision in favor of Devon.

9 678 F.3d at 364. 10

678 F.3d at 363. 11 678 F.3d at 367.

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E. Court finds that proposing party invoked an inapplicable provision of the JOA, providing for a 48-hour response period, in bad faith. Court further concludes that conveyance instrument was not limited to wellbore rights.

In Chisos, Ltd. v. JKM Energy, L.L.C.,12 Chisos proposed to recomplete a well under Section VI.A.1 of the applicable JOA. The normal election period under that provision was thirty days. However, Chisos asserted that the election period as to JKM was only forty-eight hours because a shorter deadline applied when a drilling rig was on the premises. JKM did not respond to the proposal. The trial court found that Chisos acted in bad faith in invoking the shorter deadline because it only had a workover rig (and not a drilling rig) on the property. After reciting additional facts that supported the finding that Chisos acted in bad faith in attempting to force JKM out of the operation by improperly asserting a forty-eight hour response period, the appellate court affirmed the trial court’s judgment giving JKM an opportunity to retroactively elect to participate in the operation. The court additionally considered whether a Conveyance and Bill of Sale conveyed from Chisos to JKM "all of Chisos' operating rights in the west half of Section 2, or did it convey rights only in the Stetson well?"13 The trial court found that the conveyance was ambiguous, but concluded that it conveyed all of Chisos' rights in the referenced land. The appellate court likewise found that the conveyance was ambiguous. It further noted the trial court's findings (1) that Chisos knew or had reason to know that JKM intended for the conveyance to be a transfer of all of Chisos' operating rights in the west half of Section 2, and (2) that JKM did not know or have reason to know that Chisos intended the conveyance to be limited to the producing wellbore. The court affirmed the trial court's finding that the conveyance transferred all of Chisos' operating rights in the west half of Section 2.

F. Court upholds lessee's contention that the subject well had not been “completed” under the applicable contract until it was hydraulically fractured.

The case of Bledsoe Land Co. LLLP v. Forest Oil Corp.,14 involved the issue of whether the oil and gas lessee had prosecuted the operations necessary to maintain the subject oil and gas lease in force and effect beyond its primary term. The subject lease covered a ranch that consisted of more than 60,000 gross surface acres. Given the magnitude of the acreage covered, the lease contained special provisions that, in the words of the trial court, "created two affirmative obligations on Forest Oil: (1) to continuously prosecute drilling or reworking operations; and (2) to drill a new well every

12 258 P.3d 1107, 2011-NMCA-026 (N. M. App. 2011). 13 258 P.3d at 1109. 14 2011 WL 2474407 (Colo. App. 2011).

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180 days."15 The actual wording in the special provisions stated in part that the lease "shall not terminate so long as drilling or reworking operations are being continuously prosecuted if not more than 180 days shall lapse between the completion or abandonment of one well and the beginning of operations for the drilling of another well."16 [Emphasis added] The pertinent operational chronology was that on July 19, 2007, Forest Oil reached the target depth of the Bledsoe #10 well, cased the well and released the drilling rig. On August 1, 2007 the well was perforated. On August 9, 2007, the well was hydraulically fractured. On February 1, 2008, which was more than 180 days from the date when the Bledsoe #10 well was cased and the drilling rig released, but within 180 days from the date that well was hydraulically fractured, Forest commenced the Bledsoe #8 well. The Bledsoes asserted that the 180-day obligation had been violated under the facts described above and that Forest had lost its rights under the lease as to all acreage that was not held by production. They asserted that the operative date from which the 180-day obligation should be measured was July 19, 2007. Forest contended that the Bledsoe #10 well was not "completed" until it was hydraulically fractured on August 9, 2007, which was 176 days prior to the commencement of the new well. The trial court found that the term "completion," as used in the lease, was ambiguous, and that the extrinsic evidence at trial established that the parties agreed that a well would be completed once it had been drilled, logged and either cased or abandoned. Forest appealed. The court of appeals reversed. The court of appeals agreed with Forest that the term " 'completion' has a common trade usage meaning 'capable or ready to produce gas' which the trial court disregarded."17 The court found that, while the parties could modify the meaning of "completion" by mutual agreement, no such modification was made under the lease provisions at issue in this suit. The court further observed that the lease included a provision making it subject to all federal and state laws, rules or regulations, and the Colorado Conservation Commission had, by regulation, defined completion in a way consistent with the court's decision. The court additionally found that Forest had continuously prosecuted operations in the manner required under the lease.

15 Id. at *2. 16 Id. at *1. 17 Id. at *4.

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G. Court affirms decision against well service company and in favor of Operator, finding that the limitation of liability provisions of the services contract would not be enforced based upon the evidence at trial showing unequal bargaining position.

In Arnold Oil Properties LLC v. Schlumberger Technology Corp.,18 Schlumberger provided certain cementing services in connection with a well operated by Arnold. Arnold asserted in this lawsuit that Schlumberger put more cement in the well than was needed with the result that the top of the cement rose to 10,595 feet (rather than the target 10,900 foot depth communicated to Schlumberger by Arnold. Because the cement rose to shallower depths in the well, the cement covered a shallower zone in the well that that Arnold had identified for production. Arnold incurred almost $1 million of additional expense as a result of sidetracking around the cement to reach the zone that could no longer be produced out of the original bore hole. In an effort to recover those additional expenses, Arnold filed the present lawsuit against Schlumberger for breach of contract, negligence and gross negligence. Schlumberger moved for summary judgment based upon the limitation of liability provisions of its contract with Arnold. After finding that the contract was clear and unambiguous, the District Court held that the indemnity provisions in the contract merely operated to indemnify the parties against third party claims and was not exculpatory. So the court denied summary judgment and the case proceeded to trial. The jury returned a verdict finding that the parties were equally negligent and that Schlumberger had breached its contract with Arnold. The jury awarded $350,000.00 in damages to Arnold and found that Schlumberger was not grossly negligent. The jury also found that the parties were in unequal bargaining position. Schlumberger appealed the Court’s denial of judgment as a matter of law. Schlumberger first argued that the District Court misconstrued the indemnity and hold-harmless provisions in the parties’ contract based on its mistaken belief that the parties did not intend to bar claims by Arnold against Schlumberger. The Tenth Circuit agreed with the District Court that the evidence at trial was sufficient to support the jury’s findings: “Thus, even if we were to hold the language of the parties’ contract operates to exculpate Schlumberger from any and all liability, because of the parties’ unequal bargaining position, we would have to find the exculpatory provision unenforceable under Oklahoma law. Either way, the contract cannot exculpate Schlumberger from its liability in this case.”19 Schlumberger additionally argued that the District Court should have granted its

18 672 F.3d 1202 (10th Cir. 2012). 19 672 F.3d at 1207.

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motion for judgment as a matter of law that the limitation of liability provisions limited Arnold’s recovery to the cost of services rendered---$40,893.37. However, after reviewing the evidence shown at trial concerning the non-negotiability of services contracts of the type at issue in this case, the Court of Appeals found that the evidence was sufficient for the jury to conclude that Arnold did not have a free choice in seeking alternate services, and the parties were in unequal bargaining positions. The non-negotiable nature of the form contract was so well-known that Arnold did not see the written contract, and Schlumberger did not ask Arnold to sign it until the work had already been completed. As such, the Tenth Circuit found that it could not enforce the limited liability provision of the contract. The court affirmed the District Court’s judgment in favor of Arnold.

H. Order granting summary judgment in favor of operator in lawsuit for unpaid joint interest billings was reversed based upon the existence of material disputed facts concerning the defenses asserted by the non-operator.

The case of Newfield Exploration Mid-Continent, Inc. v. Petroleum Development Co.,20 the operator (Newfield) sued the non-operator (PDC) for breach of an operating agreement dated November 14, 1996, by virtue of PDC’s failure to pay some $109,290.66 in joint interest billings with respect to the subject well. Newfield also sought to foreclose the operator’s lien that it had perfected with the filing of a lien statement. The district court entered summary judgment in favor of Newfield for the principal sum of $117,025.05 with prejudgment interest in the amount of $37,354.38, which was calculated at the rate of 6% per annum pursuant to the method described in the operating agreement. The non-operator PDC appealed. On appeal, PDC asserted that the district court erred because disputed material facts rendered summary judgment improper. In particular, PDC argued that it was excused from paying the delinquent joint interest billings because of alleged gross negligence and willful misconduct on the part of the operator. PDC listed a series of complaints about the operator’s performance and asserted that the operator was grossly negligent in preparing its workover and accompanying authority for expenditure (AFE),21 and in the actual work performed during the workover of the well. PDC also alleged that the operator’s failure to provide PDC with daily reports was willful misconduct. After reviewing the series of factual assertions of PDC that are set out in the court’s opinion, the court concluded that the material facts relating to the issue of

20 84 Okla. Bar J. 298 (Okla. App. 2013 - #110,395) (Not for Publication). 21 The opinion of the court indicates that the AFE submitted by the operator estimated a 10-day project for $121,000, but the actual work took a month and cost $239,000.

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whether the operator’s actions constituted gross negligence or willful misconduct were in dispute, and that questions remained as to whether the exculpatory clause contained in the operating agreement entitled PDC to a defense to the operator’s breach of contract claims. The court of appeals reversed the trial court’s summary judgment ruling in favor of the operator.

I. Non-Operator Sues Operator for Drilling a “Horizontal” Well Rather Than a “Vertical” Well.

The case of Summa Engineering, Inc. v. Crawley Petroleum Corp.,22 presented the court was with a complicated factual history that began with a new well proposal for a prospect in Jackson County, Oklahoma that was presented by Summa’s representatives to Mack Energy, calling for the drilling of a vertical well and including a number of other terms and conditions. Mack Energy and Crawley responded to the proposal by indicating that they were interested in pursuing Summa’s prospect, but Crawley and Mack proposed certain additional and different terms than those set forth in Summa’s proposal. A series of additional exchanges occurred between the parties with proposals and counter-proposals of various additional terms and amendments to the agreement. The parties finally reached a final agreement. In May 2004, Crawley proposed the drilling of a horizontal well to Mack under the terms of a separate operating agreement (JOA) between those two parties and mailed the representative of Summa a copy of that letter. Two representatives of Summa responded by separate letters to Crawley and Mack explaining that they thought the well should be drilled vertically rather than horizontally, for stated reasons. Several months later, Crawley advised Summa that the horizontal well had been drilled. Since Summa had a carried working interest to casing point, it asked Summa to confirm its election to participate in the after-casingpoint operations and completion of the well. Summa made no election. In a second letter with an AFE attached, Crawley proposed re-entering and deepening the well and a second lateral to a specific depth. One of Summa’s representatives responded and again recommended a vertical well. In 2006, several years after the well became productive, Summa sued Crawley and Mack for breach of contract and negligence. The case proceeded to a bench trial in July 2009. At the close of Summa’s case, the defendants demurred to the evidence, arguing that there was no requirement in the final agreement to drill a “vertical” well. They also argued that, by virtue of the terms of the agreement, the defendants owned 100% of the leasehold interest and assumed 100% of the risk and cost of drilling the well and were entitled to drill the well in the way they chose. In response, Summa asserted that the negotiations back and forth between the parties were for changes to the original proposal, and that the parties were substantially

22 2012 OK CIV APP 69, 286 P.3d 653.

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renewing the original proposal which was incorporated into the revised versions of the agreement. The defendants responded that, under basic contract law and 15 O.S. § 71, a qualified proposal is a new proposal. Summa also argued that the defendants had acted imprudently and were not in good faith in drilling the well because they had been warned that they were going to have a problem drilling a horizontal well. The trial court sustained the defendants’ demurrer. Summa appealed. In affirming the decision of the trial court, the Court of Appeals found as follows: The defendants argued that Summa’s initial proposal (which required the drilling of a vertical well) was rejected by the defendants’ counter-offer and the subsequent offers and counter-offers, and that the final agreement did not expressly or impliedly include the requirement that the well be drilled vertically. The court agreed, finding that the defendants offered new terms which completely changed the proposal and constituted a rejection or counter-proposal. Summa additionally argued that the defendants breached the agreement by improperly imposing a casingpoint election when no casing point had been reached, then unilaterally absorbing Summa’s carried working interest in the well when Summa did not make an election. The court disagreed. The court found that the agreement imposed no conditions or requirements regarding the defendants’ determination of when casing point had been reached. The court further observed that Summa did not object to the defendants’ casing point definition when Summa received the notice letter, and did not object to the request that Summa make an election. Summa finally argued that the defendants were negligent in drilling the horizontal well because they were warned ahead of time by Summa that they would not hit the target zone. The court found that there was no evidence that the defendants’ decision to drill a horizontal well was made in bad faith or was performed negligently, unreasonably or without due diligence. To the contrary, Summa’s own evidence established that the well was productive.

II. Royalty Owner Litigation

A. Appellate court vacate federal district court order from Kansas

granting certification of a royalty owner class.

The Tenth Circuit’s recent decision in Wallace B. Roderick Revocable Living

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Trust v. XTO Energy, Inc.,23 was one of two opinions issued by that court on the same date, vacating a Federal District Court order granting certification of a statewide class of royalty owners under Federal Rule 23(b)(3). The class certified below consisted of “[a]ll royalty owners of [XTO] . . . from wells located in Kansas that have produced gas and/or gas constituents (such as residue gas or methane, natural gas liquids, helium, nitrogen or condensate) from January 1, 1999 to present.” The class included thousands of royalty owners, some 650 oil and gas lease and over 300 wells spread across ten different fields in Kansas.

The court found that, under Kansas law, the lessee has an implied covenant to bear the costs that are necessary to transform the natural gas production into a marketable product, absent contractual language providing to the contrary. The plaintiff in Roderick alleged that XTO systematically underpaid royalties by deducting costs associated with making the gas production (and its constituent products) a marketable product. XTO was alleged to have marketed gas to unaffiliated third parties under contracts that (a) paid a cash fee coupled with an in-kind transfer, (b) supplied a percentage of the proceeds for an index price to pay for the gathering and processing of the production, or (c) used some combination of these methods. Royalties were allegedly paid by sharing with the royalty owners a proportionate share of these costs. The plaintiff asserted claims for breach of contract, unjust enrichment and an accounting.

XTO argued the individual issues precluded the requirements of Rule 23 from being satisfied in this case on two primary grounds. First, XTO urged that each oil and gas lease must be examined individually to determine whether the implied covenant to market has been negated by the terms of the particular lease. Second, XTO contended that the determination of when and where the production from a given well becomes a marketable product requires an individualized well-by-well analysis.

In concluding that the district court erred in certifying the class, the Tenth Circuit made a series of findings, with some of the more significant rulings being as follows:

(1) The district court has an independent obligation to conduct a rigorous

analysis before concluding that Rule 23’s requirements have been satisfied. (2) The district court abused its discretion by applying a less demanding

standard that resolved doubts in favor of certification and by possibly having altered the burden of proof by requiring XTO to disprove commonality.

(3) The commonality requirement of Rule 23 requires that the common

contention be of such a nature that it is capable of classwide resolution, which means that the determination of its truth or falsity will resolve an issue that is central to the

23 ___ F.3d ___ 2013 WL 3389469 (10th Cir. July 9, 2013).

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validity of each one of the claims in one stroke. (4) Given known variations in the language of the oil and gas leases (some 430

of which were not reviewed by the district court before entering its order), it was Roderick’s burden to affirmatively demonstrate commonality on the implied duty of marketability.

(5) Once gas is in marketable conduct, the implied covenant to market is

satisfied, regardless of whether a market exists at that location (e.g., gas may be marketable at the well).

(6) The propriety of XTO’s deductions might vary by well, depending on the

quality of the gas from the particular well. (7) Because the commonality, typicality and adequacy requirements of Rule

23(a) tend to merge, the district court on remand should consider whether the issues identified by the Tenth Circuit likewise have an impact on the typicality and adequacy requirements for certification.

(8) XTO’s alleged uniform payment methodology would not be enough to satisfy

the predominance requirement of Rule 23(b)(3). Rule 23 (b)(3)’s predominance requirement is far more demanding than Rule 23(a)’s commonality requirement.

(9) On remand, the district court should additionally consider in determining if the

predominance prerequisite of Rule 23(b)(3) is met the same issues the court has emphasized in relation to the requirements of Rule 23(a).

Finally, the appellate court rejected Roderick’s assertion that, under the doctrines of collateral estoppel or judicial estoppels, XTO was estopped from litigating the issue of class certification due to XTO’s agreement to a class-wide royalty owner settlement in a prior class action lawsuit. The Tenth Circuit vacated the district court’s class certification order and remanded the case for further proceedings consistent with its opinion.

B. Appellate court vacate federal district court order from Oklahoma granting certification of a royalty owner class.

The Tenth Circuit’s recent decision in Chieftain Royalty Company v. XTO Energy,

Inc.,24 was one of two opinions issued by that court on the same date, vacating a Federal District Court order granting certification of a statewide class of royalty owners under Federal Rule 23(b)(3). Three amicus curiae briefs were filed in this appeal by the Mid-Continent Oil & Gas Association of Oklahoma, the Oklahoma Independent

24 2013 WL 3388629 (10th Cir. July 9, 2013).

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Petroleum Association and Linn Operating, Inc.

The class certified by the district court consisted of “[a]ll non-excluded persons or entities who are or were royalty owners in Oklahoma wells since July 1, 2002 where XTO . . . is or was the operator (or, as a non-operator, XTO separately marketed gas).” The class included over 16,000 royalty owners, some 14,300 oil and gas leases and approximately 2,300 Oklahoma wells.

The court found that, under Oklahoma law and absent lease language negating the implied covenant to market or permitting certain deductions, the lessee has an implied covenant to bear the costs that are necessary to make the gas a marketable product. Chieftain alleged that XTO underpaid royalties by improperly deducting costs incurred to transform the gas produced at the wellhead into a marketable condition. Chieftain asserted claims for (a) breach of contract, (b) tortious breach of contract, (c) breach of fiduciary duty, (d) fraud, (e) conversion, (f) conspiracy, (g) accounting, and (h) injunctive relief.

XTO argued that individual issues precluded the requirements of Rule 23 from being satisfied in this case on two primary grounds. First, XTO urged that each oil and gas lease must be examined individually to determine whether the implied covenant to market has been negated by the terms of the particular lease. Second, XTO contended that the point at which production becomes a marketable product varies from well to well because the composition of gas extracted from wells depends on the type, depth and location of the underground deposit and the geology of the area. Consequently, a well-by-well individual analysis is required.

In concluding that the district court erred in certifying the class, the Tenth Circuit made a series of findings, with some of the more significant rulings being as follows:

(1) The court stated at the outset that it had discussed at length the applicable

law governing class certification in its opinion of the same date in the Roderick case, and that it would not be repeating that discussion in this opinion.

(2) The district court in Chieftain erred in relaxing the required “strict burden of

proof” and in foregoing the rigorous analysis required by Rule 23. (3) The commonality requirement of Rule 23 requires that the common

contention be of such a nature that it is capable of classwide resolution, which means that the determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.

(4) The district court erred in not examining whether lease language variations

destroy the possibility of resolving a common question on a classwide basis. The district court must address the lease language issue as it relates to Rule 23 before

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certifying the class. Some 13,568 oil and gas leases were never examined prior to the ruling on class certification.

(5) The district court must rigorously analyze whether Rule 23(a)’s commonality

requirement has been satisfied. (6) The district court is encouraged on remand to address the issue of

marketability directly in the court’s commonality analysis, keeping in mind that, under Oklahoma law, gas can be in marketable condition at the well.

(7) Because the commonality, typicality and adequacy requirements of Rule

23(a) tend to merge, the district court should consider whether the concerns identified by the Tenth Circuit have any effect on the required showing of typicality and adequacy.

(8) The district court is further directed to reconsider the predominance

requirement under Rule 23(b)(3) in light of referenced recent holdings of the United States Supreme Court as well as the concerns identified in the Roderick decision.

(9) The district court appears to have failed to have addressed the elements of

the underlying causes of action.

Finally, for the same reasons as those described in Roderick, the appellate court rejected Chieftain’s assertion that, under the doctrines of collateral estoppel or judicial estoppels, XTO was estopped from litigating the issue of class certification due to XTO’s agreement to a class-wide royalty owner settlement in a prior class action lawsuit. The Tenth Circuit vacated the district court’s class certification order and remanded the case for further proceedings consistent with its opinion.

C. Court addresses the extent to which oil and gas royalty auditors employed by the federal government may file qui tam suits using information obtained, and previously disclosed to the government, as part of their job responsibilities for the government.

In Little v. Shell Exploration & Production Co.,25 the Fifth Circuit Court of Appeals held, as a matter of first impression and with regard to the issue of “standing” alone, that relators who were federal government employees had standing to file a qui tam lawsuit under the False Claims Act (“FCA”).26 The relators were auditors for the federal Minerals Management Service (“MMS”) and, as part of their job responsibilities for the government, they focused on uncovering and reporting any underpayments and fraud that might occur in connection with the royalty payments made by Shell and other oil and gas lessees and operators with respect to federal lands.

25 690 F.3d 282 (5th Cir. 2012). 26 31 U.S.C. § 3730(b)(1).

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In 2006, the relators filed two qui tam suits alleging that Shell had defrauded the

government out of certain royalties by taking unauthorized deductions for expenses incurred in gathering and storing oil from a group of its offshore drilling platforms. The suits were later consolidated. It was undisputed that the claims alleged in the lawsuit were discovered during the course of their work as federal auditors, that reporting the information to the MMS was a requirement of their employment, and that the information was in fact communicated to the MMS before the relators’ filing of the suit. The district court granted Shell’s motion for summary judgment based upon the public disclosure bar and based upon the provisions of the FCA which describe who may bring a qui tam action. The relators appealed. The Fifth Circuit first held that the federal auditors had standing to file the qui tam action. With regard to the public disclosure bar of the FCA, the court remanded the case with directions that the district court reexamine the summary judgment evidence to determine whether a preclusive public disclosure had in fact occurred. To the extent that the district court should find on remand that a public disclosure occurred, the court held that the relators could not qualify as “original sources” under the FCA because an original source must have direct and independent knowledge and must have voluntarily provided that information to the government.27 Here, the relators’ disclosures to the government were involuntary since they were specifically employed by the agency to disclose fraud. As a result, if a public disclosure is found to have occurred, the suit must then be dismissed. In a concurring opinion, one of the three judges on the panel observed that, even though Congressional enactments had granted standing to the federal oil and gas royalty auditors, the wisdom of Congress in doing so might be questioned because the auditors may be subject to criminal or professional liability in connection with the filing of such qui tam lawsuits. The judge cited 18 U.S.C. § 208 which implicates criminal liability when a federal employee participates substantially in a lawsuit as such an employee and possesses a personal financial interest. Second, the concurring opinion noted that “the Code of Federal Regulations prohibits government employees from using ‘nonpublic Government information’ to further their private interests.”28 Finally, the judge observed that the Government Accountability Office’s standards for government auditors directs that all federal auditors “should be free both in fact and appearance from personal, external, and organizational impediments to their independence.”29

27 Id. at § 3730(e)(4). 28 5 C.F.R. §§ 2635.101(b)(3) and 2635.703(a). 29 690 F.3d at 295, citing Chapter 3.03 of the Government Accountability Office’s Generally Accepted Government Auditing Standards.

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D. Texas Supreme Court finds that royalty underpayment claims were time-barred by applicable statutes of limitation.

The case of Shell Oil Co. v. Ross,30 involved a suit for alleged underpayments of gas royalties, alleging claims breach of contract, unjust enrichment and fraud. Under the facts in the case, Shell had paid royalty from 1994 to 1997 based on what the court referred to as an “arbitrary price” that bore no relationship to the price received for the production. Shell suggested that the price may have been a computer glitch or accounting error, but was otherwise unable to explain how or why it used that price instead of a third-party sales price, and admitted that it had made a mistake. From 1988 to 1994, Shell paid royalty based upon the weighted average of the third-party sales prices of both Shell and other operators for gas sales from the unit wells. The jury found that Shell had fraudulently concealed its failure to pay royalty in accordance with the terms of the lease. Based upon the fraudulent concealment doctrine, the court awarded actual damages, prejudgment interest, attorney’s fees and costs. Shell appealed. In support of the trial court’s judgment, the royalty owners argued that the price Shell listed on their check stubs was not the same as the price Shell was being paid for the gas, so that the check stubs were alleged to be fraudulent. The royalty owners asserted that they relied on the information provided by Shell. However, the court noted that reliance is not reasonable when information revealing the truth could have been discovered within the limitations period. The court emphasized that the royalty prices the plaintiffs had been receiving on different wells varied widely, and that those variances should have alerted the plaintiffs to potential royalty underpayments. While the plaintiffs suggested that different heating values might have explained the discrepancies, the court stated that a royalty owner cannot avoid making a diligent investigation just because there might be a legitimate explanation for a suspicious royalty payment. The court noted that readily accessible and publicly available information such as the following could have led the royalty owners to discover the alleged underpayments before the limitations period expired: 1. It observed that the prices shown in the El Paso Permian Basin Index were readily accessible to the public and would have informed the royalty owners that Shell was routinely paying royalties on a lower price. 2. Additionally, a research of the Texas General Land Office records would have revealed the prices Shell paid to the State of Texas for gas royalties and would have revealed that the royalty prices used in payments to the state were routinely higher

30 356 S.W.3d 924 (Tex. 2011).

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than the price used in paying the plaintiffs. As a result, the fraudulent concealment doctrine did not toll the statute of limitations. Moreover, citing its prior decision in Wagner & Brown, Ltd. v. Horwood,31 the court noted the settled law that the “discovery rule” does not apply to defer the accrual of suits for royalty underpayment because the injury is not inherently undiscoverable with due diligence. The Texas Supreme Court reversed the Texas Court of Appeals’ prior decision affirming the trial court and reversed and rendered judgment in favor of Shell.

E. Deduction of gas processing fees from royalty payments was allowed in order to recoup a proportionate share of the lessee's monthly operating costs and capital investment in the construction of the processing plant.

In Pursue Energy Corp. v. Abernathy,32 the Mississippi Supreme Court

addressed the question of whether a lessee may deduct reasonable processing and investment costs in computing royalty payments. Under the facts presented in that case, Shell Oil Company had constructed a gas processing plant in the 1960s at a cost of $41 million for the purpose of processing "sour" gas and turning it into "sweet" gas and its by-product, sulfur. In order to recover part of its investment and the costs of operation, Shell passed on to royalty owners a proportionate share of the processing and investment costs by deducting a fee from royalty payments.

The foregoing royalty deduction practices were challenged by the royalty owners

in 1974 in litigation with ultimately resulted in the Fifth Circuit's decision in Pine Woods Country Life School v. Shell Oil Co.33 In that ruling, the Fifth Circuit determined that royalty owners could be taxed with costs of processing their gas as long as the fees were reasonable. The case was remanded to the district court which found that Shell's costs were reasonable and approved Shell's formula. At the time of that determination, Shell had not yet recovered its full $41 million capital investment. Shell completed recovery of the $41 million investment in 1990.

In 1996, Pursue purchased Shell's plant, the associated wells and related

facilities. Pursue used the Shell gas processing formula to deduct costs in computing royalty payments. In December 2000, the plaintiffs filed the present lawsuit challenging the capital investment charges that Pursue factored into royalty payments. The trial court found that the capital investment costs of the Shell plant had been previously recovered and that it was unreasonable to require the royalty owners to pay for those costs repetitively. The court ruled that the royalty owners were entitled to recover an

31 58 S.W.3d 732 (Tex. 2001). 32 2011 WL 5027134 (Miss. 2011). 33 726 F.2d 225 (5th Cir. 1984).

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amount equal to their proportionate share of the capital investment charges that duplicated the capital investment sums previously recovered by Shell. The court held that Pursue could continue to deduct daily plant operating expenses. Pursue appealed. On appeal, Pursue argued that the processing fees that it factored into royalty payments were reasonable because they were one-third to one-half less than the processing fees charged by other sour gas processors.

The Mississippi Supreme Court held "that an oil company can deduct reasonable

processing and investment costs from the payments made to royalty owners."34 However, it concluded that it was unreasonable for the plaintiffs to pay for their share of investment costs repetitively, and affirmed the trial court's decision in that respect. The court further found that Pursue, as a lessee, did not owe a fiduciary duty to the plaintiff mineral lessors, and the court reversed the trial court's ruling to the contrary.

F. Courts uphold the deduction of post-production costs from royalty

payments applying Kentucky law. The case of Poplar Creek Development Co. v. Chesapeake Appalachia, L.L.C.,35

the Sixth Circuit Court of Appeals was presented with the task of "determining whether Kentucky law allows lessees, in calculating gas royalty payments, to take into account certain post-production costs as an offset against the value or proceeds upon which royalty payments are based."36 The oil and gas leases at issue in Poplar Creek provided for royalty payments "of one-eighth (1/8) part of the wholesale market value of such gas at the well based on the usual price paid therefore in the general locality of said leased premises."37

After a detailed review of prior case law from Kentucky and other jurisdictions,

the court held that "Kentucky follows the 'at-the-well' rule, which allows for the deduction of post-production costs prior to paying appropriate royalties."38 The court further stated that "at-the-well" refers to gas in its natural state, before the gas has been processed or transported from the well. The court concluded that Chesapeake was within its rights when it deducted gathering, compression and treatment costs in its computation of royalty payments on the market value of the gas.

Approximately two months later, another court applying Kentucky law reached a

similar conclusion, relying in part on the foregoing decision in Poplar Creek. In K&D Energy v. KY USA Energy, Inc.,39 the oil and gas leases at issue in the lawsuit provided

34 2011 WL 5027134 at *4. 35 636 F.3d 235 (6th Cir. 2011). 36 Id. at 237. 37 Id. at 238. 38 Id. at 244. 39 448 B.R. 191 (W.D. Ky. 2011).

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for royalty to be paid on the basis of "one-eighth, at the market price at the well for the gas so used, for the gas from each well where gas only is found."40 The plaintiff royalty owners initiated the present adversary proceeding against the debtor in bankruptcy asserting that the debtor breached the leases by factoring into royalty payments a proportionate share of the costs of treating the gas to remove nitrogen and inerts.

Finding that the recent decision of the Sixth Circuit in Poplar Creek was

dispositive of the issue, the Bankruptcy Court held that the debtor was entitled "to deduct reasonable post-petition expenses from the Plaintiffs' royalty payments." Given the context of the entire discussion of the court, it appears that the term "post-petition" (a term commonly used in Bankruptcy Court decisions) was intended to instead state "post-production."

With regard to a second issue in the case, the court stated that the doctrine of

estoppel cannot be used to vary the terms of a plain and unambiguous lease: "Oral statements that may or may not have been made by the Debtor to Plaintiffs during negotiations for the leases cannot form the basis of an estoppel claim as the terms of the written contract supercede any such oral statements."41 The court noted that the parol evidence rule bars evidence of oral statements made prior to or contemporaneous with a written agreement that contradict, vary or alter the language in the written contract. G. Court affirms denial of class certification in royalty owner lawsuit. The case of El Reno Rod, Gun & Development Corporation v. Mack Energy Company42 involved a lawsuit by plaintiff royalty owners against Mack Energy alleging that they were underpaid royalties on oil. The plaintiffs asserted that Mack sold the oil at below-market prices to a buyer named Enerwest, and that Mack and Enerwest were commonly owned and controlled. The plaintiffs claimed that their royalty payments should not be based upon alleged affiliate transactions, but should instead be based on the subsequent arms-length oil sales by Enerwest. Specifically, the royalty owners asserted that they should be paid based on the “work-back method” under which allowable costs and expenses are deducted from the proceeds from the first downstream, arms-length sale. The plaintiff filed a motion asking the court to certify a statewide class of royalty owners in Mack Energy’s Oklahoma wells that produced oil that was sold by Mack to Enerwest. At the hearing on class certification, Mack showed that 97% of the oil produced by Mack Energy in Oklahoma and sold to Enerwest is transported by Enerwest to its blending stations where the oil is blended with additional oil purchased

40 Id. at 192-93. 41 Id. at 196. 42 84 O.B.J. 1121 (Okla. App. 2013 - #109,967) (Not for Publication).

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from third parties before being sold as a new, homogenized product.43

However, Mack noted that the oil from the Plaintiffs’ particular wells is in the 3% of Mack’s oil that does not go through the blending process. Mack asserted that this remaining 3% of its oil is produced from leases (such as Plaintiffs’ Canadian County leases) that are too distant for Enerwest to economically transport the oil to its blending stations. The 3% of the oil from those leases is sold under “exchange agreements” which provide for Enerwest’s sale of the oil at the lease to third parties who then sell a similar quantity of oil back to Enerwest at the oil market center in Cushing. The transactions provided for a price differential between the sale at the lease and the return sale, which the court described as “essentially a transportation fee to get oil from a lease to the market center. The plaintiffs asserted that the value of the oil at the Cushing market center should be the starting point for the work-back method used to arrive at the price for the oil.

The District Court denied class certification, finding that since the oil from the

Plaintiffs’ wells was dealt with by Mack Energy in an entirely different way than 97% of the oil attributable to the proposed class, the elements required for class certification were not satisfied. The court emphasized in particular that the Plaintiffs’ claims were not typical of the claims of the proposed class as a whole. The Plaintiffs appealed.

The Court of Appeals recited at length the detailed findings and conclusions of

District Judge Miller in his order denying class certification, and the appellate court summarily affirmed the District Court’s order pursuant to Oklahoma Supreme Court Rule 1.202(d).

H. Court grants in part, and denies in part, motions to dismiss the First Amended Complaint in class action royalty lawsuit.

In Hitch Enterprises, Inc., et al. v. Cimarex Energy Co.,44 Hitch filed a proposed

class action royalty lawsuit against the defendant oil and gas entities for the alleged “underpayment or non-payment of royalties on natural gas and/or constituents of the gas stream produced from wells in Oklahoma through improper accounting methods.”45 An early complex procedural history in the case preceded the defendants’ pending Motion to Dismiss First Amended Complaint in whole or in part on a series of independent grounds.

The court granted that motion in part and denies it in part. In a very lengthy

43 The court noted that “[t]he operation generally involves blending less valuable ‘sour oil’ with more valuable ‘sweet oil’ in order to create a combined product that can still be sold as ‘sweet oil.’” 44 859 F. Supp. 2d 1249 (W.D. Okla. 2012). 45 859 F.Supp.2d at 1253.

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order, some of the primary rulings of the court were as follows: First, because the plaintiffs failed to identify or describe their individual oil and gas leases (and the royalty terms therein) or attach copies of the leases to their complaint, the first amended complaint failed to state plausible claims for breach of oil and gas leases by breach of the duty to market implied therein under the prior Twombly decisions46 and subsequent precedents. That claim was dismissed without prejudice.

Second, because plaintiffs at the early stage of the litigation were permitted to

plead alternative theories and seek relief in the alternative, the court denied the defendants’ motion to dismiss the plaintiffs’ claim for unjust enrichment based upon the contention that the royalty owners could not sue for unjust enrichment because they had an adequate remedy at law under their lease contracts.

Third, because the court could not determine at the early stage of the lawsuit

whether such equitable remedies were necessary to afford the parties complete relief, the court denied the defendants’ motion to dismiss the plaintiffs’ claims for an accounting and disgorgement.

Fourth, the plaintiffs asserted claims for fraud, deceit and constructive fraud

based on alleged misrepresentations and concealment of information on monthly royalty payment check stubs. The court found that the plaintiffs’ allegations of intent in connection with the claims of fraud and deceit were sufficient under applicable standards. However, the plaintiffs’ allegation of “reliance” was conclusory and lacking factual specificity. The plaintiffs’ allegations in support of their claim for constructive fraud were found to be sufficient both factually and legally.

While the plaintiffs were not entitled to pursue a claim for breach of fiduciary duty

under the provisions of 52 O.S. §570.10(A) of the Production Revenue Standards Act, the court found that the plaintiffs were entitled to make a claim for breach of fiduciary duty under the unitization orders.

With regard to plaintiffs’ claims for tortious breach of the implied duty of good

faith and fair dealing and tortious breach of lease, the relationship between royalty owners and operators was not sufficient to result in the type of special relationship needed to support such claims, so these claims should be dismissed. Further, the defendants were entitled to dismissal of the plaintiffs’ conversion claims inasmuch as a debtor-creditor relationship does not give rise to a claim for conversion. In sum, the court dismissed the claims for: (a) breach of lease, (b) fraud, deceit and constructive fraud, (c) breach of fiduciary duty under 52 O.S. §570.10(A), (d) tortious breach of implied duty of good faith and fair dealing in the lease, (e) tortious

46 Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) and Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

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breach of lease, (f) conversion, (g) the plaintiffs’ allegations of conspiracy and joint venture, (h) any allegations seeking relief against Cimarex Energy for conduct in connection with the alleged breach of leases occurring prior to December 6, 2005, and (i) any allegations that seek relief against the co-defendants for conduct in connection with the alleged breach of leases occurring prior to May 27, 2006. The court added that the dismissal of the claims for (a) breach of lease, (b) fraud, deceit and constructive fraud, and (c) the plaintiffs’ allegations of conspiracy and joint venture, would be “without prejudice” and the plaintiffs were given an opportunity to amend their complaint.

III. Oil and Gas Lease Cancellation, Termination and Breach of

Obligation Cases (Other Than Royalty)

A. Court rejects mineral owner-lessor’s request that new duties and standards be adopted in Pennsylvania for measuring the oil and gas lessee’s development and production of oil and gas leases.

The case of Caldwell v. Kriebel Resources Co., LLC,47 involved an oil and gas lease that had been entered into in January 2001 under which Caldwell leased certain mineral rights in Pennsylvania lands to Kriebel. The leased provided for an initial 24-month term that would be extended so long as oil or gas was being produced. Caldwell agreed that gas was being produced. However, Caldwell filed suit asserting that the drilling activities under the lease to date only involved shallow gas drilling and that the defendants had not initiated any drilling activities for natural gas in the Marcellus Shale formation. The trial court dismissed the claims. On appeal the court first addressed Caldwell’s claim that Pennsylvania law should recognize a new duty on the part of an oil and gas lessee to drill to and produce from all economically exploitable strata of natural gas underlying the lease,48 and that it is not sufficient for the lessee to only produce gas from shallow formations. The court noted that the subject oil and gas lease contained express wording in paragraph 11 that “[n]o inference or covenant shall be implied as to either party hereto since the full contractual obligations and covenants of each party is [are] herin fully and expressly set forth.”49 The court further recognized that Pennsylvania law prohibits the implication of covenants where the contract contains express wording on the subject matter. Accordingly, the court concluded that it was unable to imply the covenant requested by the mineral owners, and it further found that it was not persuaded that such a new

47 2013 WL 3486851, 2013 PA Super 188. 48 In support of that contention, the plaintiff cited the Louisiana case of Goodrich v. Exxon Co., 608 So.2d 1019, 1027-28 (La. App. 1992). 49 2013 WL 3486851 at *3.

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covenant should be recognized under Pennsylvania law generally. The court then recognized that Caldwell also asked the court to recognize a new duty on the part of oil and gas lessees to develop the lease and produce hydrocarbons in paying quantities under a “good faith” standard. Caldwell asserted that a lessee who only produces from shallow formations is not acting in good faith, and that Caldwell should have been given the opportunity to present evidence of Kriebel’s bad faith at trial (rather than the court summarily denying the claim through motion practice). Caldwell proposed that the new standard for a showing of production in paying quantities should require “good faith” on the part of the lessee in producing all economically producible gas strata, as well as good faith in “marketing, delivery, production amounts, additional wells, compression, etc.”50

In support of this contention, Caldwell cited T. W. Phillips Gas and Oil Co. v. Jedlicka,51 in which the Pennsylvania Supreme Court recognized that where production from a well has been marginal or sporadic such that the well’s profits do not exceed its operating expenses, a determination of whether the well has produced in paying quantities includes consideration of whether the operator is acting in “good faith” in continuing to operate the well. However, the court in the present Caldwell case noted that the subject well was producing in profitable quantities and was simply not producing from as many formations as Caldwell desired. The court concluded that the subject oil and gas lease did not require of Kriebel the level of performance asserted by Caldwell, and the court further declined to recognize such a new and broader duty on the part of oil and gas lessees.

B. In suit by mineral owners seeking to compel oil and gas company to continue to purchase oil and gas leases under terms previously entered into with other mineral owners, court rejects the mineral owners claims for breach of contract, promissory estoppel and negligent misrepresentation.

In Maddox v. Vantage Energy, LLC,52 a group of homeowners in southwest Fort Worth (the “Maddox group”) sued Vantage for alleged breach of contract, promissory estoppel and negligent misrepresentation. The lawsuit was based upon an agreement Vantage had reached with the Southwest Fort Worth Alliance (“SFWA”), a nonprofit unincorporated association formed by certain other property owners in that region of Fort Worth. The Maddox group asserted (a) that a written contract existed between Vantage and the SFWA, (b) that the contract consisted of a series of approximately

50 Id. at *4. 51 42 A.3d 261, 267 (Pa. 2012). 52 361 S.W.3d 752 (Tex. App. – Fort Worth 2012).

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eleven emails and the attachments to those emails53 (which included a form of oil and gas lease) between Vantage and an individual acting for the SFWA, and (c) that the contract between Vantage and the SFWA was a contract for an endorsement by the Alliance of Vantage and its oil and gas lease offer. The Maddox group acknowledged that the SFWA did not have authority to, and did not, negotiate individual leases for the Maddox group or for any other mineral owners. In the course of its work, Vantage obtained over 4,000 oil and gas leases from mineral owners in the southwest Fort Worth neighborhoods. However, approximately one month later as the price of natural gas fell, Vantage suspended its leasing activities. The Maddox group filed the present lawsuit for breach of contract, promissory estoppel and negligent misrepresentation. The plaintiffs asked the court to compel Vantage to offer to purchase oil and gas leases from them in accordance with the lease form attached to the emails. The trial court granted summary judgment in favor of Vantage with respect to the Maddox group’s claims. Specifically, the trial court found that the Maddox group mineral owners did not qualify as third-party beneficiaries to the alleged contract between Vantage and SFWA. With respect to the negligent misrepresentation claim, the court found that there was no evidence that Vantage made any material misrepresentation of existing fact to the Maddox group. The Maddox group appealed. The Texas Court of Appeals observed that, traditionally, the Texas courts have presumed that a party contracts only for its own benefit, and the courts have maintained a presumption against third-party beneficiary agreements. Consequently, a third-party beneficiary will not be found unless such intent is clearly written or evidenced in the contract. The fact that a person is directly affected by the parties’ conduct, or that he may have a substantial interest in a contract’s enforcement, does not make him a third-party beneficiary.

The court concluded that the evidence showed that no map was attached to or included in the documents relied upon by the Maddox group, and the individual properties and addresses of that group were not described or mentioned in the alleged contract. None of the Maddox group owners paid any dues to SFWA, nor had they signed any documents in order to become members of the SFWA. The mere fact that they owned minerals within the geographical boundaries of one of the neighborhoods focused upon by the SFWA did not, and could not, make the plaintiffs part of an identified, discrete, limited group of individuals specifically intended to be third-party beneficiaries of the purported Vantage/SFWA contract.

53 The Maddox group cited in support of this assertion the Texas Uniform Electronic Transactions Act, which provides that an electronic signature shall be given the same legal force as an ink signature. See Tex. Bus. & Com. Code Ann. § 322.007 (West 2009). The court did not address the Maddox group's reliance on this statute.

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With regard to the claim for alleged negligent misrepresentation, the Maddox

group’s complaint was that Vantage misrepresented the length of time that its offer to lease minerals pursuant to the terms set forth in the form oil and gas lease would remain open. However, the court found that there was no evidence that Vantage had made any representation to SFWA or to any of the Maddox group owners concerning how long its offer to lease minerals under the terms of the form oil and gas lease would remain open.

Moreover, the court noted that a claim for negligent misrepresentation requires a

misrepresentation of existing fact, and a promise of future conduct will not support a negligent misrepresentation claim.

Finally, with respect to the claim of promissory estoppel, the court noted that

promissory estoppel does not operate to create liability where it does not otherwise exist. “Promissory estoppel does not create a contract where none existed before but prevents a party only from insisting upon his strict legal rights when it would be unjust to allow him to enforce them.”54 The court found that, for the same reasons that the Maddox group owners did not have standing to assert a breach of contract cause of action, they likewise lacked standing to assert a claim for promissory estoppel. Vantage did not make any promise to them, so they could not create liability for Vantage, nor could they use promissory estoppel to create some promise where none existed as a matter of law.

The Texas Court of Appeals affirmed the summary judgment ruling in favor of

Vantage. C. Court rejects contention that a series of email communications between lease broker and mineral owners resulting in a binding contract for the purchase of oil and gas leases. The case of Ballard v. XTO Energy, Inc.,55 involved a plaintiff mineral owner who joined a "pool" of other mineral owners in efforts to lease their mineral rights. In 2008, the pool of mineral owners entered into negotiations with Broussard, a lease broker representative of Dudley Land Company who was acting on behalf of XTO. Following an apparent oral discussion between certain members of the pool and Broussard, Broussard exchanged emails with Durr, a representative of the mineral owner pool. The appellate decision in this case recites the long chain of emails between those parties. The email chain concluded with an email from Broussard to Durr stating:

I was informed this morning that I have to get upper management's

54 361 S.W.3d at 761. 55 784 F.Supp.2d 635 (W.D. La. 2011).

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authority for any leases/packages that exceed 3 million dollars. As soon as I get the authority to proceed I will contact you again.56

The negotiations terminated when both Broussard and the mineral owner pool received an email from XTO advising that upper management did not approve the package. Ballard, as a member of the pool, sued XTO asserting that Broussard only informed the pool that upper management of XTO needed to approve lease purchases greater than $3 million after Broussard had already made a binding offer on behalf of XTO that was accepted. Ballard alleged that XTO was attempting to rescind a deal that had already been made. He sued for his share of the deal based on claims for breach of contract, promissory estoppel and fraud. The court first found that no contract had been created as a result of the exchange of email. In support of that finding, the court stated that assuming for the sake of argument that an email exchange could constitute a valid mineral lease or contract for lease (an issue the court specifically did not decide in this case), the email exchange would first have to "(i) evince offer and acceptance, and (ii) not show that the parties had contemplated consummating the deal by other means."57 The email exchange at issue in this case failed, in the view of the court, to satisfy either of those requirements. In reviewing the email communications, the court found that the mineral owner pool never accepted the offer from XTO. Moreover, the court found that the parties understood that they would execute additional documents before a binding contract would be formed. With regard to Ballard's claim for promissory estoppel, the court found that a critical element of such a claim is that the plaintiff's reliance on the alleged promises or representations was reasonable. In light of the wording of the parties' email communications, Ballard reasonably knew or should have known that XTO "would not be bound until the additional proposed terms were acknowledged and a written contract was consummated."58 The court likewise found that the evidence in this case did not support a claim for fraud. The court granted XTO's motion for summary judgment and dismissed Ballard's claims with prejudice.

56 Id. at 637. 57 Id. at 639. 58 Id. at 641.

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D. Court holds that the lessee's attempts to restore an old, plugged well did not satisfy the requirements of the lease that the lessee "commence operations for drilling a well." The Nebraska Supreme Court's decision in Bedore v. Ranch Oil Co.,59 involved a series of issues, only one of which will be discussed in this paper. Production under the subject oil and gas lease ceased after the expiration of its primary term. However, the lease provided that it would not terminate "provided lessee commences operations for drilling a well within sixty (60) days from such cessation."60 Rather than commencing a new well, the lessee undertook operations to restore a previously-plugged well to production and, in particular, used drilling equipment to remove the fill and the bridge plug. The court found that the wording of the oil and gas lease that required the lessee to commence operations for drilling a well was unambiguous and was not satisfied by the foregoing activities of the lessee. In reaching that holding, the court distinguished a Texas case cited by the lessee, Kothmann v. Boley,61 and noted that one of the wells involved in the Kothmann case had been redrilled to a significantly greater depth through the new operations of the lessee. In the present case, the Nebraska court found no evidence that the well was drilled deeper than its depth at the time of the prior plugging of the well. E. Oil and gas producers assert that New York's de facto moratorium on

exploration of the Marcellus Shale formation utilizing horizontal high- volume fracking constituted an event of force majeure excusing performance under leases.

The case of Wiser v. Enervest Operating, L.L.C.,62 involved oil and gas leases that had been entered into in 1999 and 2000 providing for primary terms of ten years. In July of 2008, the Governor of New York directed the state to undertake a study of the environmental effects of horizontal drilling into shale formations and the use of hydraulic fracturing procedures. The defendant lessees asserted that the governor's directives "effected a de facto moratorium on exploration of the Marcellus Shale formation utilizing horizontal high-volume fracking, which represents a force majeure within the contemplation of the parties' leases."63 During the primary terms of the leases, no wells were drilled. However, delay rental payments were paid up until December of 2008, but not in 2009. After the lessees became aware of the plaintiff mineral owners' assertion that the failure to make timely delay rental payments resulted in the automatic

59 805 N.W.2d 68 (Neb. 2011). 60 Id. at 74. 61 308 S.W.2d 1 (Tex. 1957). 62 2011 WL 3586014 (N.D.N.Y. 2011). 63 Id. at *3.

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termination of the oil and gas leases, the lessees tendered additional delay rentals to the plaintiffs toward the end of 2010, but those tenders were refused. In the present lawsuit, the plaintiffs sought a judicial declaration that the subject oil and gas leases had expired. The plaintiffs and defendants filed cross-motions for summary judgment on the issue of whether the failure to make delay rental payments beginning in 2009 resulted in the expiration of the oil and gas leases. In granting summary judgment in favor of the plaintiff mineral owners, the court addressed a number of issues. First, recognizing that there is a dearth of authority in New York on the subject, the court observed that "the weight of authority among cases construing 'unless' clauses [in oil and gas leases] favors a finding that if the lessee fails to either drill, or pay or tender the rental on or before the due date, the lease automatically terminates . . ."64 The court noted that the same outcome occurred with respect to the subject leases because the delay rental clause of the leases modified the habendum clause. Second, the court found that it it were assumed that the actions of the State of New York constituted an event of force majeure under the leases, "both logic and the unambiguous terms of the leases dictate the conclusion that the primary terms of the leases were then extended indefinitely, which required that defendants continue making timely delay rental payments indefinitely in order to avoid termination."65 A third issue asserted by the defendants was that the mineral owners had not complied with the provision of the leases that required the lessors to provide the lessees with prior notice of a default in payment or performance and an opportunity to cure the alleged default. Rejecting this defense, the court held that the provisions of the leases provided that they would automatically terminate upon the failure to pay delay rentals and that the plaintiffs were not required to give notice of default.

F. Trial court’s summary judgment ruling in favor of mineral owners on claims for lease termination based upon alleged failure of production in paying quantities is reversed on appeal.

The case of MB White, Inc. v. Gaskins,66 involved a suit by mineral owners who sought judicial cancellation of the oil and gas lease that covered their property. The oil and gas lease was dated November 19, 1953, and was for a primary term of one year. The landowners alleged that the lease terminated under its terms for failure to produce in paying quantities for all or part of the period from 2001 to 2008. The trial court granted the plaintiff mineral owners’ motion for summary judgment. The lessee appealed.

64 Id. at *8. 65 Id. at *10. 66 83 Okla. Bar J. 848 (Okla. App. 2012 - #109,690) (Not for Publication).

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The Oklahoma Court of Appeals began its analysis by noting that the term “produced,” when used in a “thereafter” provision in the habendum clause of an oil and gas lease, means the lessee must produce in quantities sufficient to yield a return, however small, in excess of the expenses necessary to lift the oil from the ground, even though the costs of drilling and completing the well might never be recouped. However, the court also recognized that the “marketing” of production is not required in order to satisfy the habendum clause. Rather, citing Pack v. Santa Fe Minerals, Inc.,67 the court stated that “produced” means “capable of producing in paying quantities” and does not include marketing of the product. The court additionally cited the decision in Stewart v. Amerada Hess Corp.,68 for its holding that “under no circumstances will cessation of production in paying quantities ipso facto deprive the lessee of his extended-term” oil and gas lease. After reviewing the summary judgment record, the court concluded that “[t]he only acceptable evidentiary materials supporting Landowners’ motion for summary judgment” were the Oklahoma Tax Commission production sales records, and that this evidence failed to establish a lack of production. Rather, at most, the Tax Commission records were found to have supported a conclusion only that oil and gas were not marketed during the relevant period. However, marketing is not required in order to satisfy the habendum clause, the Tax Commission records. The court concluded that the undisputed facts did not support a summary judgment ruling in favor of the landowners. The appellate court reversed the summary judgment ruling in favor of the landowners and remanded the case to the trial court.

G. Appellate court reverses trial court’s summary judgment ruling that oil and gas leases expired due to a failure to produce in paying quantities for an unreasonably long period.

The court in Goll v. GBF Oil Co., LLC,69 reviewed a summary judgment ruling of the trial court in favor of the plaintiff mineral owners and against the defendant oil and gas companies on the issue of whether certain oil and gas leases had expired due to a failure to produce in paying quantities for an unreasonably long period of time. The plaintiffs filed their lawsuit on January 28, 2011, asking the court to determine that the defendants’ oil and gas leases covering the plaintiffs’ lands had expired since the well producing from those leases was alleged to have not produced in paying quantities sufficient to yield a return in excess of lifting costs on the well.

67 1994 OK 23, 8, 869 P.2d 323, 326. 68 1979 OK 145, 604 P.2d 854. 69 84 Okla. Bar J. 644 (Okla. App. 2013 - #110,869) (Not for Publication).

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In support of their motion for summary judgment, the plaintiffs offered the testimony of their expert Dan Reineke who “opined that the leases expired due to non-commercial production for twenty-nine (29) months before the lawsuit was filed.”70 The plaintiffs argued that a twelve month period of production in less than paying quantities is sufficient to support cancellation of the leases. The appellant oil companies asserted that their evidence showed that the well generated a profit over lifting costs in September, October and December 2008, May, July and December 2010 and the first six months of 2011, and that the only reason the well did not generate a profit over lifting costs in 2009 was because of workover costs.71 In applying Oklahoma oil and gas lease law to the facts in this case, the Court of Appeals observed as follows:

1. In Oklahoma, the term “produced” means production in paying quantities. The phrase means the lessee must produce in quantities sufficient to yield a return, however small, in excess of “lifting expenses”72 even though the costs of drilling and completing the well might never be recovered.

2. Only those expenses which are directly related to lifting or producing

operations can be offset against production proceeds to determine whether a well is a producing well.

3. The appropriate time period for determining profitability is a time appropriate under all the facts and circumstances of each case. The time period is not measured in days, weeks or months, but by a time appropriate under all of the facts and circumstances of each case.

The appellate court concluded that there was a substantial controversy as to

whether the well failed to produce in paying quantities for an unreasonable period of time, and that the time period to be used in measuring the well’s profitability was a triable issue. Therefore, it found that the trial court erred in granting summary judgment

70 Id. at ¶5. Mr. Reineke’s report concluded that the well was non-commercial for the twenty-nine month period from August 2008 through December 2010, with a net operating loss of $15,857.00. 71 The parties disputed whether the costs of replacing the downhole pump and anchor in October 2009 should be categorized as lifting costs or workover costs. The appellate court found that the trial court erred in granting summary judgment based on competing evidence. See footnote 7 of the opinion. 72 The Court of Appeals noted that, under prior case law, lifting expenses are those necessary to lift the oil from the ground and may include, but are not limited to, “costs of operating pumps, pumpers’ salaries, costs of supervision, gross production taxes, royalties payable to the lessor, electricity, telephone, repairs and other incidental lifting expenses.” See footnote 4 of the opinion.

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in favor of the mineral owners.

IV. Oil and Gas Contracts, Transactions and Title Matters

A. Overriding royalty interest owners sue for alleged “washout” of their

overrides by taking no action to preserve underlying oil and gas leases in continuing force and effect.

In Stroud Production, L.L.C. v. Hosford,73 the claims of the parties related to the alleged “wash out” of overriding royalty interests in two oil and gas leases. The Hosford group had been assigned, in varying percentage shares, a collective 5% overriding royalty interest in the two Base Leases in September of 1978. An affiliate of Stroud bought the Base Leases in December 2003, and Stroud became the operator of the one producing well on those leases. The following are certain of the events noted by the court that occurred after the transfer of the Base Leases and operatorship of the well that maintained those leases in force and effect: January 13, 2004: Stroud’s landman obtained copies of the assignments of the overriding royalty interests to the Hosford group and advised Stroud that none of those assignments contained “extension and renewal” clauses. January 20, 2004: A “polished rod” on the only producing well holding the Base Leases in force and effect broke and production ceased. Thereafter: Stroud admitted that he knew that after the well ceased production, Stroud had 90 days (under the provisions of the Base Leases) to commence work or the Base Leases would terminate. Although Stroud acknowledged that the necessary repairs for the broken well “weren’t out of the normal,” none of the Stroud defendants conducted repairs or undertook additional drilling or reworking operations during that 90-day period. February 19, 2004: The affiliate of Stroud that owned the Base Leases entered into a new oil and gas lease with one of the two mineral owner-lessors under the Base Leases. April 20, 2004: Due to the absence of the foregoing activities during the 90 day period, the Base Leases terminated on this date. April 29, 2004: Stroud made a presentation to a group of potential investors representing that Stroud intended to repair the broken well and perform additional work.

73 2013 WL 811454 (Tex. App. – Hous. 2013).

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May 2004: It appears that the affiliate of Stroud obtained a new lease from the other mineral owner-lessor in May. (See footnote 5 of the opinion). May 2004: At a cost of $7,500, Stroud repaired the well and resumed production shortly thereafter. No overriding royalty interests were assigned as to the new leases. The overriding royalty owners sued Stroud and its affiliate that owned the Base Leases for breach of contract, intentional termination of overriding royalty interests and a series of other theories for recovery. At the trial, the court directed a verdict in favor of the Stroud group on the overriding royalty interest owners’ claims for breach of duty of good faith and fair dealing, fraudulent concealment and breach of implied covenant to develop. The remaining claims were submitted to the jury which found that the affiliate of Stroud intentionally terminated the Base Leases in order to destroy the Hosford group’s overriding royalty interests, that the affiliate converted the proceeds from the overrides, Stroud intentionally interfered with the override owners’ right to receive their overrides, and Stroud and its affiliate engaged in a conspiracy to deprive the overriding royalty owners of their interests. The court entered judgment on the jury verdict for damages in the approximate amount of $250,000, for pre-judgment interest in the amount of approximately $40,000, and for attorney’s fees in the amount of approximately $360,000. The Stroud defendants appealed. The Texas Court of Appeals affirmed the judgment in part and reversed it in part. Certain of the key rulings were as follows: 1. With regard to the duty owed to override owners, the court observed that the Texas courts have been reluctant to recognize any sort of duty, fiduciary or otherwise, flowing from a lessee to the holder of an overriding royalty interest. 74 The court found that, other than the fact that the Hosford group held overriding royalty interests in the Base Leases, there was no evidence of any special relationship of trust and confidence between the Hosford group and the owner of the Base Leases. 2. The court concluded that because there was no evidence that the Stroud defendants violated any express or implied contractual duty, and there was no evidence of the existence of a fiduciary or confidential relationship, the trial court erred in entering judgment against the Stroud defendants based upon the override owners’ claim that the defendants intentionally terminated the Base Leases to destroy their overriding royalty interests. 3. The trial court erred in entering judgment against the Stroud defendants

74 2013 WL 811454 (Tex. App. 2013), at *9.

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based upon the override owners’ conversion claims. 4. The Hosford plaintiffs were not legally entitled to recover overriding royalties once the Base Leases terminated. The trial court erred in entering judgment in favor of the override owners on their tortious interference claim. 5. The trial court likewise erred in entering judgment in favor of the override owners on their conspiracy claims.

B. Non-Operators, as third-party beneficiaries, enforced their right to sell their working interests under the agreement entered into by the operator.

Before the court in Chesapeake Louisiana, L.P. v. Buffco Production, Inc.,75 were multiple cross-motions for summary judgment on various disputes related to the purchase and sale of oil and gas properties. Chesapeake (as buyer) and Buffco (as seller) entered into a letter agreement under which Chesapeake agreed to acquire a three-year term assignment of the working interests of Buffco and its non-operating cotenants in the subject leases as to multiple oil and gas units in several counties in East Texas for a sales price of $232,146,680.00. The court opined that, given Chesapeake’s express agreement under the contract to make the same offer under the same terms to the non-operators in the properties, “the Non-Ops Clause clearly meant that Chesapeake intended to acquire all of the leasehold estate beneath the properties described in the exhibits. The evidence showed that, in the course of the due diligence review, the title report inaccurately reflected that the Geisler Unit was owned 50% by Buffco and 50% by Freeman. It was undisputed in the case that the correct ownership tabulation for the working interest in that unit was Buffco (25%), Freeman (22%), Freeman Capital (3%) and Harleton (50%). It was also undisputed that neither Buffco nor Freeman advised Chesapeake of the correct ownership for the Geisler Unit at or prior to the closing. On the closing date, Chesapeake paid the full purchase price for the Geisler Unit ($13,600,000) to Buffco who in turn delivered 50% of those proceeds to Freeman. None of the proceeds were paid to Harleton and Freeman Capital. Chesapeake and Buffco agreed to delay the closing on certain other properties covered by the letter agreement, and the parties ultimately agreed to cancel the purchase and sale of those properties. Because Chesapeake paid the full purchase price for the Geisler Unit but received only a 47% interest in that unit, Chesapeake sued Buffco for breach of contract. The non-operating working interest owners (Freeman Capital and Harleton) intervened in the lawsuit to seek enforcement of the letter agreement as sellers. They

75 849 F.Supp.2d 727 (E.D. Tex. 2012).

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advised that they stood ready, willing and able to make assignments to Chesapeake upon receipt of their shares of the agreed purchase price. On December 31, 2011, Chesapeake and Buffco entered into a confidential settlement agreement settling all claims between those two parties. The intervening non-operators continued to pursue their claims. In ruling on the issues presented, the court held in part as follows: 1. The court found that it was clear that the parties understood that the non-operators would benefit from the letter agreement and that Chesapeake and Buffco intended to confer such a benefit on the non-operators. Accordingly, the non-operators were third-party beneficiaries to the letter agreement and had standing to enforce its terms. 2. The court ruled that Buffco and Freeman were unjustly enriched by Chesapeake’s payment to them of the full $13,600,000 purchase price for the Geisler Unit since 53% of the working interest rights in that unit were owned at the time of the closing by Harleton and Freeman Capital. To remedy that unjust enrichment, the court imposed a constructive trust on the portion of the funds paid by Chesapeake which rightfully belonged to Harleton ($6,800,000) and Freeman Capital ($408,000), representing the total sum of $7,208,000 (53% of the $13,600,000 purchase price). The court further directed, as part of the specific performance remedy, that Chesapeake receive a corresponding assignment of Harleton’s 50% interest and Freeman Capital’s 3% interest in the Geisler Unit. 3. Since the court found that the non-operators were entitled to enforce the letter agreement and sell their working interests to Chesapeake, the court denied Chesapeake’s request for a refund of the purchase price that it overpaid to Buffco and Freeman (i.e., the $7,208,000 attributable to the interests Buffco and Freeman did not own). However, as indicated in the preceding paragraph, Chesapeake was entitled to an assignment of the additional 53% interest in the unit. 4. Finally, the court rejected Harleton’s claims that Buffco violated a “right of first refusal” owing to Harleton because Harleton admitted that it would not have purchased Buffco’s interest in the subject property even if Buffco had offered to sell it prior to the Buffco-Chesapeake closing at the agreed $20,000 per acre price. That admission precluded Harleton from asserting that it was damaged by the failure of Buffco to recognize its alleged right of first refusal.

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C. Court finds that the recording of an oil and gas lease by a non-record mineral owner was sufficient to disrupt the twenty-year period of non-use of the minerals under the North Dakota statutes relating to abandoned minerals.

The North Dakota Supreme Court’s decision in Estate of Christeson v. Gilstad,76 involved the state’s statutory procedure by which a surface owner. may succeed to ownership of abandoned mineral interests underlying their lands.77 Christeson had acquired the surface and one-eighth of the miner rights in certain lands in 1963. In 1964, she conveyed her surface rights to the Gilstads but reserved her mineral interest. In 1989, the successors to Christeson upon her prior death (who were the legal owners, but they had not placed their succession ownership “of record”) executed an Oil and Gas Lease on the property, and the lease was recorded in the real estate records. In 2007, the Gilstads, as current owners of the surface estate, published a Notice of Lapse of Mineral Interests under N.D.C.C. ch. 38-18.1 to have the minerals deemed abandoned. The Gilstads mailed copies of the Notice of Lapse to the deceased Christeson using the address that appeared of record.

The North Dakota statute provided that a “mineral interest is, if unused for a period of twenty years immediately preceding the first publication of the notice required by section 38-18.1-06, deemed to be abandoned, unless a statement of claim is recorded in accordance with section 38-18.1-04. . .” The statute goes on to provide that a mineral interest is deemed to be used when, among other things, “d. The mineral interest on any tract is subject to a lease, mortgage, assignment, or conveyance of the mineral interest recorded in the office of the recorder in the county in which the mineral interest is located.”

The dispositive issue in the present case was whether the recording of a lease

executed by one who is the legal owner of the mineral interest but is not the “record owner” constitutes a “use” under the above statutes. The Gilstads asserted that only an oil and gas lease executed by a “record” owner of the mineral interest can constitute a use under the Act. The trial court held in favor of Christeson and against the Gilstads.

In affirming the ruling that the Gilstads did not acquire the minerals under North

Dakota’s abandoned mineral statutes, the court noted that the terms “owner” and “record owner” do not appear in the subject statutes, and that there is not requirement that the type of lease needed to constitute a “use” be executed by a “record” owner. The court further found that the Gilstads had cited no precedent to support their argument, and the court declined to imply such a requirement.

76 829 N.W.2d 453, 2013 ND 50. 77 Chapter 38-18.1, N.D.C.C.

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D. Texas Court of Appeals grants rehearing in lawsuit determining the consequence of a forged contract.

In Raven Resources, LLC v. Legacy Reserves Operating, LP,78 the court was presented with a dispute over the sale of certain oil and gas properties. Raven was interested in selling, and Legacy was interested in buying, certain oil and gas leases. After extended negotiations between the representative of Raven (the “Negotiator”) and Legacy, Legacy forwarded a draft of an agreement to Raven. The draft was not signed by Legacy, was dated June 22, 2007, and contained the word “DRAFT.” The draft agreement did not contain any details describing the properties to be conveyed. The purchase price to be paid by Legacy, as stated in this draft agreement, was $26,626,000. The sole managing member of Raven (the “Manager”), was the only person authorized to commit Raven to such an agreement. He signed the draft agreement and returned it to Legacy. After having performed its due diligence and after continued negotiations with Raven’s Negotiator, Legacy determined that there were certain adjustments that needed to be made in the detail and extent of the property interests and other matters, including price, before Legacy would complete the transaction. So, in a subsequent agreement dated July 11, 2007, Legacy made those changes and reduced the purchase price to $20,300,000—which represented almost a 25% reduction in the price. Legacy sent the July 11, 2007 agreement to the Negotiator. However, the Negotiator did not tell the Manager about the changes and the subsequent agreement. The court found that he instead forged the Manager’s name and returned the July 11 agreement to Legacy. The Negotiator had no authority to bind Raven to any agreement. Raven made no contention that Legacy knew about the forgery. Legacy proceeded to pay the 5% earnest money to Raven. Thereafter, the parties closed the transaction by mail. Thirty-five Assignments and Bills of Sale dated August 3, 2007 which incorporated the terms of the July 11, 2007, agreement, were delivered. Also on August 3, 2007, Legacy transferred $18,925,000.03, the balance due under the reduced purchase price provisions in the July 11 agreement. Raven used the money to pay debts and partners. Some three weeks after Raven executed the assignments and used the purchase price proceeds to pay debts and its partners, Raven discovered that the amount deposited into its bank account by Legacy was $6,326,000.00 less than the higher purchase price set out in the June 22 Draft agreement that was signed by Raven.

78 2011 WL 1744079 (Tex. App. – Eastland 2011). Opinion replaced upon grant of rehearing and new opinion issued at 363 S.W.3d 865 (Tex. App.-Eastland 2012).

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This litigation ensued, in which Raven sought (a) a declaration that the July 11 agreement was forged and, therefore, void, (b) rescission of each of the assignments based on mutual mistake. Legacy asserted that, even if the July 11 agreement was forged, that agreement was nevertheless valid because Raven had ratified and adopted it. The trial court granted summary judgment in favor of Legacy and entered a take nothing judgment against Raven. Raven appealed. In the first opinion of the court of appeals, the court reversed the decision of the trial court and found in part as follows: 1. The court found that the summary judgment evidence established that the July 11 agreement was forged. Because it was forged, the agreement was void. 2. With respect to Legacy’s contention that the July 11 agreement was effective because it was “ratified” by Raven, the court found that while a “voidable” contract can be ratified, a “void” contract cannot be ratified. 3. Rather than ratification, the court found that the appropriate legal concept applicable to instances that involve forged instruments is one involving principles of “adoption.” When a person’s name has been forged to a document, that person may expressly adopt that void instrument as his or her own. 4. Legacy argued that since the law provides that a party (Raven) who signs an instrument (assignment) is charged with knowledge of its contents, including documents incorporated by reference, Raven’s execution of the Assignments and Bills of Sale should bind Legacy to the July 11 agreement. The court found that the referenced legal principle does not apply to void (forged) agreements. When an instrument is void, it is as though it never existed. Therefore, a reference in the assignments to the forged agreement was, in effect, a reference to nothing. 5. The court concluded that there must be some express adoption of a void, forged agreement by the party whose name has been forged to it before it is binding upon that party. In this case, the summary judgment evidence was found to show that Raven never so expressly adopted the forged July 11 agreement as its own. 6. Finally, the court found that the incorporation by reference of the void July 11 agreement in the Assignments and Bills of Sale did not void the assignments. The court reversed the trial court’s judgment and remanded the case for the trial court to address any issues regarding the repayment of the funds advanced by Legacy, as well as any issues regarding any consideration received by Legacy from or related to the properties.

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In the second opinion of the court of appeals, the court affirmed the decision of the trial court and found in part as follows: 1. Just as it found in its first opinion, the court concluded that the summary judgment evidence showed that the July 11 agreement (containing the reduced purchase price) was forged and therefore invalid. The forged agreement was void. 2. The court then noted that while it is true that a reference to a void agreement references nothing, the court had come to the conclusion that it need not decide the effect of that principle in this case because the parties in this lawsuit had done more than merely reference the void July 11 agreement in the assignments. Rather, the parties specifically incorporated the terms of that agreement into the assignments. As a result, the parties made the actual terms of the July 11 agreement a part of the content of the assignments regardless of whether the July 11 agreement was void. 3. The court found that the assignments (which effectively contained the provisions of the July 11 agreement) were valid and enforceable in and of themselves, and that the incorporated of the forged, void July 11 agreement into the assignments did not render the assignments void. 4. Since the court found that the assignments were valid and enforceable, the court concluded that it was not necessary to consider whether Raven adopted or ratified the July 11 agreement. 5. The court then addressed Raven's contention that, even if the assignments were valid, Raven was entitled to rescind them due to mutual mistake as to the purchase price. In rejecting that argument, the court noted that a party is presumed to know the contents of a document that it signs, including the contents of documents that are incorporated by reference. The court found that Raven had presented no evidence that would raise a fact issue as to whether Legacy was operating under any mistaken beliefs. The court held that there was an express agreement that governed the parties and issues in this lawsuit, and that the trial court did not err when it granted summary judgment in favor of the buyer, Legacy.

E. Court affirms ruling that buyer of oil and gas assets who had expressly disclaimed reliance on any information and representations of the seller was precluded from suing the seller. Court further finds that the seller's engineering firm that provided information to the buyer had not entered into an implied contract with the buyer.

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The case of Capco Energy, Incorporated v. Tana Exploration Company,79 involved an appeal from the U.S. District Court for the Southern District of Texas.80 The factual backdrop involved activities related to Tana’s sale of certain oil and gas properties located in the Gulf of Mexico.

Tana engaged Tristone to serve as its financial advisor and agent in marketing and selling the properties, and also retained Ryder Scott to review geological, engineering and other data in order to prepare a report estimating the reserves, future production and income attributable to the properties as of April 1, 2006 (the “April 1, 2006 Reserve Report”). Tristone utilized data provided by Tana and the April 1, 2006 Report to conduct its evaluation of the properties, and it prepared a Confidential Evaluation Brochure (the “Brochure”) for review by parties interested in placing a bid to purchase the properties. In order to receive the information regarding the properties, Capco signed an agreement that accepted Tana’s express and highlighted disclaimer of any responsibility for the accuracy of the information Capco received. Capco also agreed that it would rely solely on its own independent evaluation and analysis of the information when deciding whether to purchase the properties.

On May 3, 2006, Capco submitted a successful bid to purchase the properties, and expressly acknowledged that neither Tana nor Tristone made an representations or warranties as to the accuracy, completeness or materiality of any information or data (written or oral) that may have been provided to Capco in connection with the transaction, and that Capco relied solely on its own independent investigation of the properties. On June 2, 2006, the parties executed a Purchase and Sale Agreement (“PSA”) under which Tana again, among other caveats and disclaimers, disclaimed any responsibility for the accuracy of the information that had been provided, and Capco again agreed that, in making its decision to purchase the properties, Capco relied solely on its own independent evaluation, and not on any representations or warranties outside the PSA. On June 4, 2006, an employee of Capco informed Ryder Scott that Capco had executed a PSA to purchase the properties, and that Capco’s lender (Union Bank) wanted to meet with Ryder Scott engineers to review the properties to determine loan values. Five days later, on June 9th, a meeting occurred with representatives of Ryder, Union Bank and Capco in attendance. Representatives of Ryder Scott made a presentation regarding the properties which included a review of the April 1, 2006 Reserve Report that Ryder had prepared for Tana. After the meeting, Ryder Scott sent

79 669 F.3d 274 (5th Cir. 2012), applying Texas law. 80 Amco Energy, Inc., fka Capco Offshore, Inc. v. Tana Exploration Co., 455 B.R. 584 (Bankr. S.D. Tex. 2011).

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an invoice to Capco in the amount of $2,032.50 for “services rendered in connection with the review of [Capco’s] reserves and the Tana Acquisition Reserves with Union Bank of California.”81 Capco paid the invoice.

On August 31, 2006, Capco closed its acquisition of the properties. Months later

in early 2007, Capco hired Ryder Scott to prepare an estimate of the remaining volumes of oil and gas reserves, future production and income attributable to the properties as of December 31, 2006 (the “December 31, 2006 Reserve Report”). Capco contends that the December 31, 2006 Reserve Report indicated that reserves on a majority of the properties were less than reflected on the earlier April 1, 2006 Reserve Report.

On April 7, 2008, Capco filed for bankruptcy protection under Chapter 11. On August 28, 2008, Capco filed an adversary proceeding against Ryder Scott,

Tana and Tristone seeking damages and rescission of its purchase of the properties based upon alleged fraudulent representations and alleging breach of professional obligations by the engineering firm. The bankruptcy court granted summary judgment in favor of the defendants, and the district court affirmed. Capco appealed.

With regard to Ryder Scott, Capco asserted that an implied contract had been

formed in connection with the June 9, 2006 meeting under which Ryder was to conduct an independent re-evaluation of the properties and advise Capco regarding its closing on the properties, and that Ryder Scott breached its professional responsibilities. Capco further contended that, based on that implied contract, it had a right to rely on the representations made by Ryder regarding the accuracy of the reserve estimates in its April 1, 2006 Reserve Report. To support the claims of an implied contract with Ryder Scott, Capco relied on (a) the email setting up the June 9 meeting with Ryder Scott, (b) the invoice from Ryder to Capco following the meeting, and (3) an affidavit from an employee of Capco who attended the June 9 meeting at which the April 1, 2006 Reserve Report was reviewed in detail, with the affiant stating that his view of the purpose of the meeting was to assure both Capco and Union Bank that proceeding with the proposed acquisition and financing was a sound decision.

The court found that nothing in the evidence presented gave any indication that

Ryder agreed to provide anything beyond a presentation of the April 1, 2006 Reserve Report that was prepared for the Seller, or that Ryder actually provided any new information beyond the scope of that report. There was no evidence of any "meeting of the minds" with respect to an independent re-evaluation of the properties by Ryder Scott. The court affirmed the lower court's ruling in favor of Ryder Scott.

Regarding Capco's claims against the seller of the properties and Tristone, the

agent who assisted in the sale, Capco relied upon a series of alleged representations as

81 669 F.3d at 277-78.

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to the productive quality and capability of the properties. However, the court noted the extensive written disclaimers agreed to by Capco to the effect that it was not relying on any representations of the seller and Tristone, and was relying solely on its own independent evaluation of the properties. Because of those agreements, the court found that even if the seller had provided Capco with information and representations that were false, the provisions of the PSA prevented Capco from asserting reliance on such information and representations. The court further noted that certain of the alleged misrepresentations were made after the PSA had been signed, so that those representations could not have induced Capco to sign the PSA. The court affirmed the ruling in favor of the seller and its agent in the marketing of the properties.

F. Court finds that genuine issues of material fact precluded a summary judgment disposition of whether certain pre-petition conveyances of term overriding royalty interests and net profits interests constituted real property conveyances or should be recharacterized as debt instruments.

In certain adversary proceedings in In re ATP Oil & Gas Corporation,82 the court was presented with motions for summary judgment on the issue of whether certain pre-bankruptcy petition transactions between the debtor (ATP) and TM and Diamond constituted real property conveyances (which is the way the documents characterized the conveyances) or should instead be recharacterized as debt instruments. The conveyances transferred term overriding royalty interests and net profits interests. Competing expert testimony was presented which addressed the economic substance of the conveyances and industry custom. After conducting a very detailed review of the records in a series of prior hearings on related issues, as well as the evidence presented by the parties on the current motions, the court concluded that it could not decide the issues on a summary judgment basis because the conflicting presentations showed genuine issues of material fact.

G. Volumetric production payment assignments from a working interest owner to certain banks were found to not violate the obligations to the other parties to applicable joint operating agreements.

The case of McCall v. Chesapeake Energy Corporation,83 involved an appeal by McCall of the district court’s judgment dismissing her claims under Fed. R. Civ. P. 12(b)(6). McCall was a non-operator in various wells in which Chesapeake was a co-working interest owner. McCall alleged that Chesapeake’s volumetric production payment (VPP) transactions with various third parties violated the duties Chesapeake owed to McCall under applicable joint operating agreements (JOAs).

82 ___ B.R.___, 2013 WL 3866495 (Bkrtycy. S.D. Tex. 2013). 83 509 Fed. Appx. 62 (2nd Cir. 2013).

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The court found that “[a]s a matter of law, the conveyances from the Chesapeake Defendants to the banks in this case were term overriding royalty interests, which conveyed only an interest in gas when it was produced and not ownership of the unproduced gas in the ground.”84 The court cited prior authority for the proposition that “the essential difference between a sale of a royalty interest and a sale of a mineral interest in land leased for minerals is that the purchaser of the royalty interest receives nothing under the lease unless profitable production is obtained.”85 Finding that the JOAs between McCall and Chesapeake expressly contemplated that the working interest owners indeed may convey their interests in the proportionate share of the production in just the manner presented in this lawsuit, and the VPPs did not convey the unproduced gas in the ground, McCall’s claims for breach of contract and conversion failed.

H. Trustee in bankruptcy asserts that agreement was a loan rather than an assignment. Financing statements were invalidated due to the incorrect description of the debtor’s name.

In C. W. Mining Company v. Standard Industries, Inc.,86 the court was presented with a dispute over the characterization and effect of an Advance Payment Agreement between a coal broker (Standard) and the bankrupt coal producer (C.W. Mining or “CWM”). The bankruptcy Trustee asserted that, when considered as a whole, the agreement unambiguously provided security for loans issued by Standard to CWM. Standard, on the other hand, alleged that it pre-purchased coal from CWM and took title to that coal the instant it was mined. Under Standard’s interpretation, it owned the coal mined by CWM. The court found that each of those conflicting interpretations of the nature of the transaction found certain support in the wording of the Advance Payment Agreement, with the result that the agreement was ambiguous on the issue of whether Standard and CWM intended to create a genuine assignment or, instead, a loan transaction disguised as an assignment. As a consequence, the court could not decide the question through a summary judgment ruling. The court also addressed the contention that the financing statements filed to perfect certain security interests incorrectly described the name of the debtor and were ineffective under the provisions of Utah Code Ann. § 70A-9a-506(3). In particular, the registered organization name of CWM was “C. W. Mining Company.” The financing statements filed by the appellants in this case described the debtor as “CW Mining Company.” The Trustee submitted a declaration from the director of the Utah Division of Corporations and Commercial Code indicating that a search under the debtor’s

84 Id. at 64. 85 Id. at 64-65. 86 488 B.R. 715 (D. Utah 2013).

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correct name using the filing office’s standard search logic would not have revealed the creditor’s security interest due to the incorrect description of the debtor’s name. In finding that the financing statement was ineffective, the court observed that “revised Article 9 is unforgiving of even minimal errors.”87

I. Court Declines to Imply a Reservation of Minerals in Deeds of Residental Lots.

The case of Farm & Ranch Investors, Ltd. v. Titan Operating, L.L.C.,88 dealt with

the following primary factual scenario. Caldwell’s Creek owned some sixty acres of land known as the Caldwell’s Creek Addition. One of the restrictions contained in the dedication recorded in the land records provided that “no oil drilling, oil development operations, oil refining, quarrying or mining operations of any kind shall be permitted upon or on any lot. All mineral rights shall belong and shall continue to belong to the limited partnership of Caldwell’s Creek, LTD.”

After the restrictive covenants were recorded, the land was divided into lots and

the lots were sold to individual owners. The warranty deeds in favor of the individual owners stated that the conveyances were “made subject to any and all easements, restrictions, and mineral reservations affecting said property that are filed for record in the office of the County Clerk of Tarrant County, Texas.” The deeds did not contain a separate reservation of the mineral interest. Thereafter, Caldwell’s Creek purported to convey all of the oil, gas, and mineral rights to Farm & Ranch by special mineral deed. Farm & Ranch negotiated to grant an oil and gas lease to Titan. However, Titan decided that Farm & Ranch did not hold the mineral rights in the Caldwell’s Creek addition and refused to enter into a lease with Farm & Ranch. Instead, Titan entered into leases with the nine owners of lots in the addition. Then Titan sued Farm & Ranch seeking a declaratory judgment that it owned leases covering the mineral rights in the nine lots.

The trial court granted summary judgment in favor of Titan finding that Titan

owned fee simple determinable title to the minerals under these nine subject lots in the Caldwell‘s Creek subdivision pursuant to its oil and gas leases. Farm & Ranch appealed.

The Texas Court of Appeals affirmed the trial court’s decision. At the time

Caldwell’s Creek, Ltd. filed the restrictions, it owned both the mineral and surface rights to the land. The court found that an owner cannot reserve to himself an interest in property that it already owns. The recorded dedication and restrictions did not convey any surface or mineral estates to another party. The court additionally noted in its opinion that the recorded restrictions were subject to change by a vote of 70% of the lot

87 Id. at 728. 88

369 S.W.3d 679 (Tex. App. 2012 – Fort Worth).

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owners. So, to construe the restriction as a reservation of the mineral rights would mean that the lot owners could vote to divest Caldwell’s Creek, Ltd. of its mineral rights simply by voting it to themselves. The court rejected Farm & Creek’s contention that the restrictions and the deeds must be read as an integrated instrument of conveyance. The argument of Farm & Creek ignored the fact that the restrictions were neither a lease nor an instrument of conveyance, and thus could not reserve an interest. When Caldwell’s Creek conveyed its interests to the lot owners without reservation, it conveyed its interests in both the mineral and surface. The appellate court concluded that the trial court did not err in granting Titan’s motion for summary judgment.

J. Court addresses contention that buyer of minerals had duty to

disclose to seller that a producing well was located within a unit that included the minerals, that production proceeds were in suspense for the owner and related information.

In Croslin v. Enerlex, Inc.,89 the three plaintiff mineral owners sued Enerlex

seeking a judgment cancelling certain mineral deeds in favor of Enerlex. Enerlex made an unsolicited offer, which was accepted by the Croslin group, to purchase certain mineral interests from the three selling owners for a total sum of $4,100.00, with the buyer being entitled to thereafter receive “all royalties, accruals and other benefits, if any, from Oil and Gas heretofore or hereafter run.” At the time the owners agreed to sell the minerals, he did not know that a currently producing well was located within a unit that included the purchased interests and that the State Treasurer’s office was holding some $10,000.00 in unclaimed proceeds attributable to the subject interests. When the selling owners later learned of the existing production and the undistributed royalties awaiting the owners of the minerals, they filed suit seeking cancellation of the deeds. On motion for summary judgment, the Trial Court ruled in favor of the sellers and cancelled the mineral deeds. Enerlex appealed. The Oklahoma Court of Appeals reversed the District Court's ruling and found that Enerlex, the grantee-purchaser of the minerals, was a "silent" grantee with no duty to disclose the information relied upon by the sellers in seeking cancellation of the deeds:90

"The 1988 Uptegraft opinion91. . . clearly held that a grantee with knowledge may remain a silent grantee and is under no duty to speak unless he chooses to do so, and then he must speak the truth and not suppress the facts within his knowledge or materially qualify fact stated

89 2013 OK 34, ___ P.3d ___. 90 Croslin v. Enerlex, Inc., Okla. App. 2012, Appeal No. 109,786, opinion issued Oct. 5, 2012. 91 Uptegraft v. Dome Petroleum Corp., 1988 OK 129, 764 P.2d 1350, at ¶ 10 – ¶ 12.

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(sic)."92 Among other arguments, the sellers asserted that, because Enerlex knew of funds being held in suspense attributable to the subject mineral interests, Enerlex made "active misrepresentations" to the sellers by Enerlex’s inclusion of the words "if any" in the above-quoted words of the mineral deed concerning the grantee's right to receive royalties, accruals and other benefits from prior oil and gas production. The court found that those words were not a positive representation or misrepresentation of material facts sufficient to trigger a duty on the part of Enerlex to disclose additional known facts concerning the properties. The Oklahoma Supreme granted discretionary review of the lower courts’ decisions. In the attached lengthy opinion of the Court, it vacates the Court of Appeals’ opinion and affirms the summary judgment ruling of the District Court cancelling the mineral deeds. The Oklahoma Supreme Court stated in part as follows:

¶37 In summary, defendant wanted to spend a total of $4,100.00 in cash and get nearly $10,000.00 in cash plus four mineral acres and future income. To accomplish its goal, defendant offered to purchase the four mineral acres from plaintiffs for a total of $4,100.00, and relying on plaintiffs' ignorance of the nearly $10,000.00 of accrued mineral proceeds, defendant provided plaintiffs mineral deeds transferring both the four mineral acres and the accrued mineral proceeds. Defendant obtained the mineral deeds from plaintiff by false representation and suppression of the whole truth. Defendant is liable to plaintiffs for constructive fraud. . . . ¶30 . . . the accrued mineral proceeds undoubtedly motivated defendant's unsolicited offers to purchase the mineral interest. Although defendant's letter referred to "mineral interest" and did not mention accrued mineral proceeds, defendant's mineral deed conveyed the "mineral interest" and also made a representation about the accrued mineral proceeds. It provided that the grant of the mineral interest was intended to grant defendant the right to "all royalties, accruals and other benefits, if any, from all Oil and Gas heretofore or hereafter run." (Bold added [by the Court]). Instead of disclosing the nearly $10,000.00 of accrued mineral proceeds to the plaintiffs, defendant remained silent, and, with the "if any" language in the mineral deed, indirectly if not directly, created a false impression that defendant did not know of any production or any accruals from all oil and gas heretofore run. Plaintiffs relied, to their detriment, on the false impression created by the "if any" language. The "if any" language in the mineral deeds discouraged, rather than encouraged, the

92 Croslin v. Enerlex, Inc., Okla. App. 2012, Appeal No. 109,786, opinion issued Oct. 5, 2012, at ¶ 8.

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plaintiffs to make an independent investigation into the mineral interest. ¶31 Further, defendant discouraged plaintiffs from doubting defendant's truthfulness through the false impression that defendant had not investigated the ownership of the mineral interest. The false impression was created by the language in defendant's offer letter that "when the Mineral Deed has been received by our office, we will begin our title examination" and that the drafts will "be paid upon completion of the title examination." ¶32 The language in defendant's mineral deed assigning the accruals of royalties, if any, from heretofore runs gave rise to a duty on the part of defendant to disclose the whole truth, including all material facts about the accrual of the mineral proceeds. Deardorf93 expressed the principles governing defendant's duty - where defendant is under a duty to say nothing or to tell the whole truth, defendant's duty to tell the whole truth may arise from partial disclosure and defendant conveying a false impression by disclosing some facts and concealing others is guilty of fraud in that the concealment is in effect a false representation that what is disclosed is the whole truth. Plaintiffs were entitled to summary judgment on the legal issue of defendant's disclosure duty as a matter of law.

The Court additionally discussed the mineral owner-sellers’ contention that the pooled mineral interest statutes (52 O.S. §§ 55.1 et seq.) and the unclaimed property statutes (60 O.S. §§ 651, et seq.) express a public policy that obligated Enerlex, as a proposed buyer, to disclose to the sellers the proceeds being held in suspense with regard to the subject minerals. The Oklahoma Supreme Court vacated the Court of Appeals’ decision and affirmed the District Court’s summary judgment in favor of the plaintiff-sellers.94

93 Deardorf v. Rosenbusch, 1949 OK 117, 206 P.2d 996. 94 See also Harbour Mineral Properties v. Pence, 82 Okla. Bar J. 585 (Okla. App. 2011 - #108,822) (Not for Publication). Note: This opinion was originally designated by the Oklahoma Court of Appeals for publication. However, on May 2, 2011, in denying certiorari, the Oklahoma Supreme Court withdrew the case from publication. The Court of Appeals in Harbour held that the seller of the minerals had submitted evidence that the buyer obtained the seller’s assent to the purchase contract by failing to disclose that the minerals were in a producing oil and gas unit and that funds were being held in suspense in a formal fund attributable to the mineral interest. It affirmed the district court’s order cancelling the deed.

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K. Applying the decision in Croslin, the court affirms the rescission and cancellation of mineral deeds.

The case of Enerlex, Inc. v. Unknown Heirs, Executors, etc. of Thomas Howard Carpenter,95 involved issues similar to those presented in the foregoing Croslin case. Enerlex purchased a one acre mineral interest from the Heirs of Thomas Carpenter, who died in 1981. The Heirs executed mineral deeds in January 2009, and those deeds were recorded the next month. In July 2009, Enerlex filed suit seeking a judgment quieting title in the minerals and declaring Enerlex’s entitlement to receive $5,000 in unclaimed royalties attributable to the interest. The Heirs asserted that the deeds had been procured by Enerlex through fraud and should be cancelled. In particular, the Heirs asserted, among other things, that Enerlex failed to disclose that the mineral interest was subject to a forced pooling order and that an escrow account held funds attributable to their interest in the amount of some $5,000. Enerlex responded that, by making these claims, the Heirs were violating their warranty obligations by attempting to prevent the quiet and peaceable possession of the property and by failing to defend title against adverse claim. Enerlex also alleged that the Heirs were slandering its title and tortuously interfering with its contractual rights. The trial court entered summary judgment in favor of the Heirs and found that they were entitled to rescission and cancellation of their deeds to Enerlex. Enerlex appealed. The Court of Appeals noted and summarized the Oklahoma Supreme Court’s recent decision in Croslin v. Enerlex, Inc.96 in which it affirmed the cancellation of certain mineral deeds based upon misrepresentations and constructive fraud. The Court of Appeals stated that “[w]e find no significant distinction between the facts in Croslin and the facts before us, with the exception that, in this case, Enerlex claimed at times not to have known of the existence of the escrowed funds.” The court found that this distinction made no difference because, if neither party knew of the escrowed funds at the time of the purchase, the agreement could be rescinded for mutual mistake. Pursuant to the ruling of the Oklahoma Supreme Court in Croslin, the appellate court affirmed the rescission of the deeds in this case.

L. Court rejects assertion that the negotiations and communications between the parties had formed a binding agreement to sell and buy oil and gas assets.

The case of WGT Gas Processing, L.P. v. ConocoPhillips Company,97 involved ConocoPhillips' ("COPC"} proposed sale of several of its natural gas processing plants

95 84 Okla. Bar. J. 1987 (Okla. App. 2013 - #110,571) (Not for Publication). 96 2013 OK 34, ___ P.3d ___. 97 2010 WL 695801 (Tex. App. – Houston 2010).

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and pipelines, including the San Angelo Operating Unit ("SAOU"). COPC engaged Morgan Stanley to conduct the sale. Morgan Stanley issued a notice inviting interested parties to potentially bid on the assets that were posted for sale. After WGT signed a confidentiality agreement, Morgan Stanley gave WTG a Confidential Information Memorandum describing the assets in more detail and outlining the steps of the transaction process (including the submission of non-binding indications of interest, the seller's evaluation of the indications of interest, invitations to a number of bidders to attend a management presentation, due diligence, drafting a Purchase and Sale Agreement ("PSA"), etc.). The Confidential Information Memorandum expressly provided that Morgan Stanley and COPC reserved the right to negotiate with one or more parties at any time and to enter into preliminary or definitive agreements at anytime and without notice, and reserved the right to reject any and all final bids without providing reasons and to terminate negotiations at any time for any reason or for no reason at all. The bid procedures included a provision that a "Proposal will only be deemed to be accepted upon the execution and delivery by ConocoPhillips of a [PSA(s)], and further stated that "[u]ntil the [PSA(s) for this transaction is executed by ConocoPhillips and a purchaser, [ConocoPhillips] . . . shall not have any obligations to any party with respect to the contemplated transaction . . ." Id. at *2. The documentation (which the court referred to in its opinion as being one-sided in favor of the seller group) included a number of additional provisions providing protection to Morgan Stanley and COPC. The court's opinion then describes in great detail the steps pursued by WGT and COPC in pursuit of the possible sale of the SAOU assets to WGT, and the opinion details the extensive communications between the parties. According to the deposition testimony of WGT's principal negotiator in the transaction, COPC and Morgan Stanley representatives ultimately telephoned the WGT negotiator stating the following:

"ConocoPhillips had decided to 'go forward with' WTG; ConocoPhillips and WTG had a 'deal,' ConocoPhillips had some 'immaterial' changes--'wording' issues—to WTG's draft PSA; the parties would 'proceed to get it signed'; and ConocoPhillips would forward a revised version the next day . . . ” Id. at *2.

WGT also pointed to other alleged communications and conduct as further supporting its contention that the parties reached the point of having a binding agreement. However, the parties never reached the point of signing a PSA. Rather, on the date when COPC had said it would submit to WGT a revised version of the PSA, Targa submitted a competing bid. At one point several weeks later, WGT asked if it would be given the opportunity to revise its bid before COPC accepted the other offer. WTG subsequently advised Morgan Stanley that it would not increase its offer because it believed the parties had

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an agreement, and that WGT expected COPC to "honor its commitment to accept [WGT's] bid." Morgan Stanley reminded WGT that the bid materials advised that COPC could negotiate with any party until a PSA was signed. Morgan Stanley advised that it wanted to keep negotiations open with WGT as a good alternative in the event the Targa deal did not go through. When asked where WGT stood should COPC decide to proceed with a sale of the assets to it, WGT indicated that it was "basically down to finalizing the PSA and verifying volumes." Id. at *5. COPC and Targa thereafter executed a PSA for the SAOU assets. A few days later, Morgan Stanley informed WGT that it then had an executed definitive agreement with Targa. WTG sued COPC for breach of contract, fraud and negligent misrepresentation and Sued Targa for tortious interference with contract or prospective business relationship. The trial court entered summary judgment in favor of COPC and Targa. WGT appealed. On appeal, COPC pointed to the provisions of the bid procedures which stated that a proposal would only be deemed accepted upon the execution and delivery of a PSA by COPC. In response, WGT argued that (1) the fact that the parties contemplated later execution of a PSA did not necessarily preclude their informal agreement from constituting a binding contract, and (2) a fact issue existed on whether COPC had modified or waived the provisions that COPC was relying on through its conduct. In addressing those contentions in detail, the following are among the more interesting findings and comments of the court: 1. The COPC bid procedures unequivocally provided that COPC did not intend to accept an offer, or bear any contractual obligations to another party, absent execution of a PSA. Thus, execution of a PSA was clearly a condition precedent to contract formation and not merely a memorialization of an existing contract. Id. at *9. 2. The court cited the Restatement (Second) of Contracts, Sec. 27, comment B (1981), stating that "[I]f either party knows or has reason to know that the other party regards the agreement as incomplete and intends that no obligation shall exist until other terms are assented to or until the whole has been reduced to another written form, the preliminary negotiations and agreements do not constitute a contract." 3. With regard to WTG's contention that a party can orally modify a contract even if the contract itself contains language prohibiting oral modification, where the parties agree to disregard this language,98 and that a party may waive a condition it originally imposed as a prerequisite to contract formation,99 the court observed that for an implied waiver to be found through a party's conduct, the intent must be clearly

98 The court cited Morrison v. Ins. Co. of North America, 6 S.W. 605, 609 (Tex. 1887), and Mar-Lan Indus., Inc. v. Nelson, 635 S.W.2d 853, 855 (Tex. App. – El Paso 1982). 99 The court cited Padilla v. LaFrance, 907 S.W.2d 454, 460-61 (Tex. 1995).

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demonstrated by the surrounding facts and circumstances. Id. at *11. a. In determining if there was such an implied waiver, the court first noted that one of the stated objectives of the bid process was to obtain for COPC the highest possible value, and to execute a PSA with the buyer who offered the proposal that would best meet COPC's objectives. So, to find a waiver would run contrary to the purpose of the overall bid process. b. The court found that "parties may structure their negotiations so that they preliminarily agree on certain terms, yet protect themselves from being prematurely bound in the event they disagree on other terms." Id. at *12. c. The court noted that "the bid procedures at issue were intended in part to protect ConocoPhillips in a situation such as the present dispute; i.e. prevent informal preliminary agreement with a prospective purchaser from forming a binding contract before execution of the formal writing." Id. d. The actions of COPC subsequent to the alleged formation of a binding deal were found to be insufficient to raise a fact issue on whether the oral representations of COPC and Morgan Stanley constituted a waiver of the bid procedures and an acceptance of WGTs offer. To the contrary, COPC's subsequent actions negated that it had waived the procedures and accepted WGT's offer. e. In footnote 15 of its opinion, the court found that the subsequent actions of WGT were "somewhat inconsistent regarding whether it believed ConocoPhillips had accepted WGT's offer." f. Finally, the court acknowledged that "the bid procedures were one-sided in ConocoPhillips's favor. . . We also acknowledge that, under our reasoning, it would be difficult for WTG to raise a fact issue on waiver short of an express statement of waiver by ConocoPhillips, whether communicated to WTG or formulated internally, or its engaging in partial performance of the contract. Regardless, WTG chose to participate in the process knowing ConocoPhillips precluded its acceptance of a bid, and essentially reserved the right to change its mind, before execution of a PSA." 4. With regard to the claims against Targa, the court found that its conclusion that there was no contract meant that, as a matter of law, Targa was not liable for tortious interference. The court affirmed the summary judgment rulings in favor of COPC and Targa.

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M. Court Declines to Recognize an Unprecedented Right of Redemption in the Context of a Partition Sale.

The case of Noble v. Noble,100 while not an oil and gas property case, deals with a principal of real estate law that can certainly arise in an oil and gas context. The Plaintiffs and Defendant inherited from their grandfather 880 acres of real property in Major County, Oklahoma. When they could not agree to a manner for partitioning the property “in kind,” the plaintiffs brought the present lawsuit seeking a partition “by sale.” The trial court appointed commissioners to appraise the property, directed the sale of the property by the county sheriff for not less than two-thirds of the appraised value, and ordered a division of the proceeds among the Plaintiffs and Defendant. The commissioners returned their report valuing the property at $528,000.00, and neither side objected to the report. The Appellees purchased the property at the sheriff’s sale for $378,400.00 (i.e. 72% of the value determined by the commissioners). The Plaintiffs below filed a motion to confirm the sheriff’s sale. The Defendant filed an object and a Notice advising that the Defendant was exercising its “right of redemption.” After a hearing, the trial court denied the asserted right of redemption and a sheriff’s deed issued to the Appellees. The Defendant appealed. In affirming the decision of the trial court the Court of Appeals noted that the statutes establishing the procedures for partition make no provision for an owner to have a right of redemption after the sheriff’s sale in furtherance of a partition by sale. Moreover, no party in the case had cited, nor did the appellate court find, any Oklahoma decisions addressing whether a right of redemption exists in partition lawsuits. Rather, the Defendant cited and relied upon Oklahoma cases involving mortgage foreclosure sales where a right of redemption has been recognized. The Court of Appeals declined to establish new law recognizing a right of redemption within the context of partition by sale. Among other considerations, the court found that one co-owner of the property to be partitioned by sale has no more superior claim to possession of the whole parcel than any other co-owner. In contrast, where a mortgage or other lien foreclosure is involved, one might reasonably argue that the owner of the property sold in satisfaction of the mortgage or tax debt ought to be afforded the right to rescue his property from loss by satisfying the debt for which the sale was ordered. The court concluded that, in a partition action, a right to redemption would lie, if at all, only with the existence of statutory authority and the presence of a debtor-creditor relationship. The court affirmed the trial court conclusion that no right of redemption existed in the present case. As a final note, the Appellees requested an award of appellate attorney’s fees

100 2013 OK CIV APP 41, ___ P.3d ___.

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under the frivolous appeal provisions of 20 OS. §15.1. However, given the lack of a precedential ruling on the issue of redemption in partition sales, the court was reluctant to charcerize the appeal as wholly without merit under the cited statute such as to warrant an award of appellate attorney’s fees.

N. Court finds that (a) attempt to challenge the adequacy of notice provided in connection with a 1998 force pooling order was an impermissible collateral attack on the order, and (b) defendants who invoked the Nonjudicial Marketable Title Procedures Act during the course of the lawsuit were entitled to fees and costs.

In Tucker v. Special Energy Corp.,101 the Oklahoma Court of Appeals reviewed the latest judgment of a trial court in a case that has been the subject of protracted legal proceedings.102 Some of the key factual elements of this case were as follows: The 1998 Corporation Commission Force Pooling Application In July 1998, DPC Corporation filed an application with the Corporation Commission seeking to force pool certain property that included the Taft mineral acreage. The application listed W.H. and Hazel Taft as owners but did not contain any mailing address for either one of them. In August 1998, the Commission entered an order force pooling the unit and finding “that DPC had exercised due diligence to locate each respondent and required DPC to escrow any funds payable to those respondents who could not be located.” (¶4). In 2004, Joseph Taft executed certain leases covering the Taft mineral acreage, including a lease to Tucker covering 2/3rds of the five-acre interest. But it was not until 2004 and 2005 that any proceedings were instituted to judicially determine the heirs of W.H. and Hazel Taft. The 2005 Corporation Commission Application In June 2005, Tucker filed an amended application with the Corporation Commission asking it to construe, clarify and vacate the 1998 force pooling order. Tucker challenged the adequacy of the pooling notice given in 1998 based upon the contention that Joseph Taft’s execution of mineral conveyances in 2004 provided constructive notice of his status as an heir of W. H. Taft. Based upon the findings of the Administrative Law Judge in the Commission proceedings, Tucker was a landman who searched for the heirs of W. H. Taft and obtained an agreement with Joseph Taft to attempt to recover the funds DPC had placed in escrow.

101 2013 OK CIV APP 56, ___ P.3d ___. 102 See Tucker v. Special Energy Corp., 2008 OK 57, 187 P.3d 730.

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The ALJ concluded (a) that the notice given in the 1998 matter was sufficient, (b) that because Joseph Taft was not a record owner in 1998, he would not have been a proper party, and (c) that Tucker’s application was an impermissible collateral attack on the 1998 Pooling Order. The Commission Appellate Referee affirmed the ALJ’s report and the Corporation Commission denied Tucker’s application on May 5, 2006. Tucker did not appeal the order. The 2006 Quiet Title Lawsuit In December 2006, Tucker and Joseph Taft filed the present action seeking an order determining and quieting title to Tucker’s leasehold interest and Taft’s mineral interest. The plaintiffs also sought an accounting for the proceeds from the production of minerals attributable to those interests. In January 2007, prior to the assertion of any counterclaims, the attorney for the Special Energy defendants sent a letter to the plaintiffs demanding the non-judicial resolution of the plaintiffs’ claims. The attorney tendered curative instruments to remove the cloud of plaintiffs’ claims and to quiet title in the defendants. The plaintiffs did not execute the tendered instruments. The defendants then counterclaimed to quiet title in them. The District Court granted the defendants’ motion to dismiss the lawsuit on the ground that it constituted an impermissible collateral attack on the 1998 force pooling order. The Court of Appeals affirmed. However, the Oklahoma Supreme Court reversed. If found that the Corporation Commission does not have the authority to determine the effect of its order on a legal title to property. Rather, it is the district courts that have jurisdiction to resolve disputes over private rights. The Oklahoma Supreme Court held that the plaintiffs’ suit to quiet title and to receive an accounting properly invoked the jurisdiction of the district courts and that the Commission could not grant the remedy the plaintiffs sought. See Tucker v. Special Energy Corp.103 The court concluded that a district court “clearly has jurisdiction to adjudicate the legal effect . . . of a Commission order. . . upon title to land,” citing Nilsen v. Ports of Call Oil Co., 1985 OK 104, ¶12, 711 P.2d 98, at 101. Proceedings After Remand to the District Court The Oklahoma Supreme Court remanded the case to the District Court. On remand, the parties entered into a series of stipulations establishing the facts described in the present opinion. The District Court proceeded to conduct a trial based upon the stipulations of the parties. In reviewing what the court considered to be some of the key stipulations, the trial court observed:

103 2008 OK 57, 187 P.3d at 733.

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“Since the remand of this matter, the Plaintiffs admit that they are owed no sums under the 1998 Pooling Order, and instead, that Plaintiffs herein seek to have the pooling order declared void as to their interest. The Plaintiffs have specifically disclaimed being owed any funds ‘held in escrow.’ . . . Based on this stipulation, the Court finds that the Plaintiffs’ current and actual claims are the exact claims expressly rejected and disallowed as an ‘impermissible collateral attack’ by the Oklahoma Supreme Court in its prior opinion.”104

The District Court went on to find:

(A) Tucker had previously challenged the validity of the pooling order, the Corporation Commission rejected his challenge and Tucker elected not to appeal the Commission’s final order, with the result that that determination was binding on the trial court under the doctrine of issue preclusion.

(B) In any event, even if the Plaintiffs were to be given another challenge to

the 1998 force pooling order, that order “was correctly and properly obtained because every diligent effort was made to provide notice to all those who would claim an interest. The ‘heir’ of W. H. Taft was unknown because the ‘heir” (Joseph Taft) elected to file no probate action for nearly thirty (30) years.”105 (C) “[T]he Court finds that the 1998 Pooling Order is valid and proper in all respects and applies to the mineral interest now claimed by the Plaintiffs. . . The Defendants also published notice of their pooling application, giving proper ‘constructive notice’ to any unknown ‘heirs.’”106 (D) Given that the plaintiffs stipulated that they are owed no sums under the 1998 force pooling order, the court denied the plaintiffs’ equitable claim for an accounting. The trial court entered judgment in favor of defendants and thereafter awarded the defendants attorneys fees and costs against the plaintiffs under Oklahoma’s Nonjudiciail Marketable Title Procedures Act (NMTPA).107 The Appeal of the District Court’s New Judgment The plaintiffs appealed the adverse ruling of the District Court. The Court of Appeals noted that the plaintiffs devoted four of their five propositions on appeal to their

104 84 Okla. Bar J. 442, at ¶10 (Okla. App. 2013 - #109,285) (Released for Publication). 105 Id. 106 Id. 107 12 O.S. § 1141.1 – 1141.5.

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effort to again challenge the 1998 force pooling order due to alleged inadequate notice. In rejecting the plaintiffs renewed challenge to that polling order:

(A) The court noted that this same complaint of the plaintiffs had been at the heart of every proceeding before the Corporation Commission and the trial court since 2005.

(B) The Corporation Commission, Oklahoma Court of Appeals and Oklahoma Supreme Court had all recognized that any challenge to the validity of the 1998 pooling order at this late date amounted to an impermissible collateral attack on the pooling order because no jurisdictional infirmity was shown on the face of the record. (C) The Corporation Commission in the 2005 proceeding again rejected Tucker’s challenge to the pooling order and the Commission’s order was not appealed and is now final. On the final appeal issue regarding the award of attorney fees, the plaintiffs argued that they never made a pre-litigation demand on the defendants for non-judicial resolution of their quiet title claim. However, the court noted that, prior to the assertion of any counterclaims, the defendants made written demand on the plaintiffs for non-judicial curative action and submitted to the plaintiffs the instruments necessary to remove the cloud created by plaintiffs’ claims, and the plaintiffs did not respond. Considering the underlying purpose of the NMTPA, the Court of Appeals stated that this case presented the precise set of facts and circumstances in which the NMTPA authorizes an award of attorneys fees and costs against the plaintiffs. The trial courts judgment in favor of the defendants and awarding attorney fees and costs to the defendants was affirmed.

O. Applying Illinois law, court rejects attempt to convert a letter of intent that expressly disclaimed any binding effect into an enforceable contract.

In BPI Energy Holdings, Inc. v. IEC (Montgomery), LLC,108 the plaintiff BPI was a producer of coal bed methane gas, and the defendant Drummond was a coal mining company. BPI and Drummond entered into a memorandum of understanding, which was followed by a letter of intent ("LOI"), under which BPI agreed to sell coal options to Drummond, and Drummond agreed to lease to BPI the right to produce gas from any of its coal holdings. The LOI recited that the parties desired to form a strategic alliance. When the subsequent efforts of the parties to pursue the proposed transaction, Drummond terminated the letter of intent, and BPI sued to enforce the LOI. The court observed that the LOI expressly stated that

108 664 F.3d 131 (7th Cir. 2011). Decided December 8, 2011.

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the parties acknowledge that this [letter of intent] does not constitute a binding agreement upon the parties . . . A binding commitment . . . will result only from execution of definitive agreements.109

The court held that a document can be a contract without calling itself a contrace, and it noted that many letters of intent give rise to contractual rights and obligations. However, "when a document says it isn't a contract, it isn't a contract."110 The court went on to state that "[i]t is reckless to rely on an agreement expressly stated to be nonbinding. Such a statement is equivalent to saying 'you rely at your peril.'"111 The plaintiffs' efforts to use the doctrine of promissory fraud as a means of overcoming the express disclaimers in the LOI were rejected by the court.

V. Marketing and Refining of Oil and Gas Production

A. Court finds that supplier of gas who invoked force majeure did not have a duty to seek replacement gas for delivery under the supply contract.

The case of Ergon-West Virginia, Incorporated v. Dynegy Marketing & Trade,112

presented a dispute under two contracts between Dynegy (a gas supplier) and the Ergon entities that managed refinery plants. Since the 1990s, Dynegy had contracted to supply Ergon’s natural gas supply. When Hurricanes Katrina and Rita occurred in 2005, Dynegy’s own gas suppliers declared force majeure, which led Dynegy to in turn invoke force majeure under the two contracts as it reduced its supply of gas to Ergon. As a result, Ergon had to buy gas on the open market at higher prices during the period of force majeure.

Ergon sued Dynegy asserting that its contracts required Dynegy to attempt to

procure replacement gas, and that Dynegy made no attempt to do so. Dynegy denied that it had any such obligation.

After a bench trial, the district court held that one of the contracts was ambiguous

and that extrinsic evidence113 showed that the contract did not obligate Dynegy to attempt to secure replacement gas. However, as to the other gas supply contract, the

109 Id. at 134-135. 110 Id. at 136. 111 Id. at 139. 112 706 F.3d 419 (5th Cir. 2013). 113 Dynegy offered unrebutted testimony in the form of an expert witness who testified that it is a universal practice in the gas industry for a downstream supplier to declare force majeure when its upstream supplier has done so and that the downstream supplier is not expected or obligated to search for replacement gas. 706 F.3d at 423.

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court found that the force majeure clause was unambiguous and required the party invoking force majeure to demonstrate that the applicable event was one that it could not overcome with due diligence. The force majeure provision in the second contract also indicated that force majeure events had the additional attribute of being events which by the exercise of due diligence such party is unable to prevent or overcome. Accordingly, the district court found that Dynegy did have the asserted obligation under that contract and it awarded Ergon damages equal to the difference between the cover price and the Dynegy contract price plus pre-judgment interest.

On appeal, the Fifth Circuit found that the district court erred in finding that the

first contract was ambiguous. The first contract’s force majeure provision required the party invoking force majeure to try to remedy the event “with all reasonable dispatch,” which the court found to be an unambiguous phrase. However, the appellate court found that it was nevertheless appropriate for the district court to look to extrinsic evidence to determine as a factual matter what “reasonable dispatch” involves under the circumstances of this case. In particular, the trial court properly considered the unrebutted extrinsic evidence, the expert testimony, regarding the standards used by the gas industry to determine what was “reasonable dispatch” under the circumstances. The Fifth Circuit concluded that the district court did not clearly err in finding that “reasonable dispatch” does not include a duty to try to secure replacement gas.

As to the second gas supply contract, the appellate court found that the trial court

erred in finding that the contract was unambiguous since the pertinent provisions of the force majeure provision were subject to multiple reasonable meanings. Because the court found that the second contract was ambiguous, it held that the trial court erred in not considering the same extrinsic evidence and expert testimony that the court took into account in finding in favor of Dynegy as to the first supply contract. Based upon that expert testimony, the Fifth Circuit held that Dynegy was not liable to Ergon for its failure to seek replacement gas.

B. Court rejects producer's claim of entitlement to payment for the

value of liquids that condensed within gas purchaser's compression facilities.

The case of Forest Oil Corp. v. Eagle Rock Field Services, LP,114 involved a gas

purchase agreement under which Forest (as seller) and Eagle Rock (as buyer) were successors. The agreement entitled Forest to be paid for eight-five percent of the natural gas liquids ("NGLs") and residue gas up to a certain quantity, and ninety-two percent of the NGLs and residue gas exceeding that quantity. In 2007, Forest sued Eagle Rock for failing to pay to Forest the value associated with liquids that condensed within Eagle Rock's compression facilities. In particular, Forest complained that "Eagle Rock's compression of Forest's gas through 'mechanically induced changes in

114 349 S.W.3d 696 (Tex. App. – Hous. 2011).

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pressures and temperatures' constituted 'processing'—a term not defined in the agreement—resulting in the recovery of NGLs for which Forest should be compensated."115 At the conclusion of a bench trial, the court entered judgment for Eagle Rock. Forest appealed.

In concluding that the trial court correctly found that the term "processing," as

applied to the agreement, does not include "compression," the court noted that Forest's witnesses acknowledged at trial that the terms of the contract allowed Forest to install compression if necessary to deliver its gas a the pressure needed to enter Eagle Rock's gathering system. Forest's witnesses also agreed that, under Forest's definition of "processing," compression of the gas in the field constituted processing. However, the contract expressly prohibited Forest from processing the gas before delivering it to Eagle Rock. The court found that Forest's definition of "processing" was in conflict with the terms of the agreement and that Eagle Rock's use of compression could not be considered contractual processing.

The court stated that its decision was supported by the Texas Supreme Court

decision in Dynegy Midstream Services, L.P. v. Apache Corp.116 in which the court ruled that the purchaser was required to pay Apache for liquids produced and sold at the processing plants at the end of the purchaser's gathering system, but was not required to pay Apache for condensate that fell out of the gas stream at the compressor stations.

Finally, the court noted the amicus curiae participation in this appeal of the Texas

Pipeline Association: The association contends that thousands of gas-purchase agreements entered into by their members rely on the accepted industry definition of "processing" to mean "the act of extracting liquids at a gas processing plant, not the incidental condensation of liquids at a compression facility." To suggest otherwise, the association maintains, "is to suggest that an entire pipeline system is a gas processing facility whose primary function is to extract liquids from a natural gas stream."

The court found that the Texas Pipeline Association took a position consistent with the court resolution of this appeal, but noted that the court's conclusion in favor of Eagle Rock was based on the language of the applicable agreement and the prior Dynegy opinion.

115 Id. at 698. 116 294 S.W.3d 164 (Tex. 2009).

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C. Court reviews principles of agency law to determine if gas trading company had the authority to bind gas buyer to agreements with gas producer.

In Reliant Energy Services, Inc. v. Cotton Valley Compression, L.L.C.,117 Cotton Valley (a group of natural gas producers that joined together to build a gas compression station and to jointly selll their gas) sued Reliant (a gas buyer) based on theories of actual and apparent agency by a third party, Westfield, who was alleged to have acted on behalf of Reliant. Westfield was a small natural gas trading company that had demonstrated an ability to for identifying producing fields, establishing relationships with gas producers and aggregating significant volumes of gas.

Westfield had signed a contract to supply natural gas to Reliant. Westfield and Reliant had a number of unwritten agreements relating to their arrangement. Because Wesfield and Reliant often made verbal agreements, the written contract between them did not fully explain their relationship. Additionally, Wesfield—with Reliant’s knowledge—routinely used Reliant’s name as Westfield’s calling card to find producers since the Reliant name provided Westifeld credibility with the producers. Reliant later directed Westfield to stop that practice (with the evidence suggesting that this direction likely occurred sometime after the Cotton Valley deal at issue in this lawsuit was made).

Once Westfield made arrangements with the producers for delivery of the gas,

Reliant took over and worked directly with the producers in executing the transactions required by the transporting pipeline for the transfer of the gas. Under this method, as far as the pipeline data system was concerned, physical possession of the gas passed directly from the producers to Reliant.

From this basic description of the roles of each party, the court’s decision includes some 10 single-spaced pages of text describing the lengthy and complex factual and procedural background associated with the dispute that arose between the parties. Reference is made to the lengthy court decision for a description of the the controversies that developed between the parties. The court in this case was asked to address a number of principles of agency law in determining whether Westfield had “authority” to act for Reliant in its dealings with Cotton Valley..

At the conclusion of the trial, the jury found in favor of Cotton Valley on both of the agency theories and rejected Reliant’s affirmative defense of quasi estoppel. The trial court rendered judgment on the verdict against Reliant under the theory of apparent authority but granted Reliant’s motion for judgment notwithstanding the verdict on the theory of actual authority. Both parties appealed.

In affirming the decision of the trial court, the Court of Appeals found in part as

117 336 S.W.3d 764 (Tex. App. – Hous. 2011).

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follows: 1. The court began its analysis by noting that the law does not presume

agency. Rather, the party asserting agency as the burden to prove it. The fact that a third party has a “good faith belief” that a person with whom it is dealing is the agent of another is not enough to bind the purported principal. A principal is only liable for the acts of another acting as its agent when the agent has “actual” authority or “apparent” authority to do those acts or when the principal ratifies those acts.

2. Actual Authority. The court found that actual authority includes both

express and implied authority. Express authority is delegated to an agent by words of the principal that expressly authorize the agent to do an act on behalf of the principal. Implied authority is the authority of an agent to do whatever is necessary and proper to carry out the agent’s express powers, so implied authority can only exist as an adjunct to express actual authority.

3. In order to prove “actual authority,” there must be evidence that either (a)

the principal intentionally conferred authority on another to act as its agent, or (b) the principal intentionally, or by want of due care, allowed another to believe that it possessed authority to act as the principal’s agent.

4. Apparent Authority. The court determined that apparent authority is

based on estoppel, and only conduct of the principal in leading a third party to believe that the agent has authority may be considered. “Apparent authority arises either from (1) a principal knowingly permitting an agent to hold himself out as having authority, or (2) a principal’s actions which lack such ordinary care as to clothe an agent with the indicia of authority, thus leading a reasonably prudent person to believe that the agent has the authority he purports to exercise.”118

5. The court additionally noted that, in order for “apparent” authority to be

established, it is essential that the principal have full knowledge of all material facts at the time of the conduct alleged to be the basis for the estoppel. The other party just show justifiable reliance on the principal’s words or conduct resulting in harm to the party.

6. After reviewing the detailed evidence and applying agency law, the Court

of Appeals concluded that the trial court did not err in rendering the judgment notwithstanding the verdict in favor of Reliant on the issue of “actual authority.” The court found that there was no evidence of any agreement that Wesfield act on behalf and for the benefit of Reliant in purchasing gas from Cotton Valley.

7. With regard to the jury verdict and judgment against Reliant on the issue

118 336 S.W.3d 764, at 784.

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of “apparent” authority, the court held that “[c]onsidering the usual practices of the gas-selling business as testified to at trial, we conclude that there was some evidence of a ‘pattern of conduct’ by Reliant in its dealings with Cotton Valley that amounted to a ‘lack of ordinary care’ that bestowed ‘indications of authority’ on Westfield . . . the actual---and unusual---course of dealings between Reliant and Cotton Valley regarding the gas arrangement, sometimes involving Westfield (as in the escrow account), sometimes not, particularly the direct exchange of gas between Cotton Valley and Reliant in gas-imbalance transfers, and especially the August 1999 transaction in which Reliant essentially ‘took’ Cotton Valley’s gas, supported Cotton Valley’s belief in a ‘direct deal’ btween Cotton Valley and Reliant and bestowed indications of authority on Westfield as Reliant’s apparent agent in the arrangement.”119

8. Affirmative Defense of Quasi Estoppel. Finally, Reliant argued that

because Cotton Valley always previously invoiced and looked to Westfield for the gas deivered to Reliant, Cotton Valley was estopped as a matter of law from seeking payment from Reliant for the July 2001 gas. The court observed that the doctrine of quasi estoppel precludes a party from asserting to another’s disadvantage a right inconsistent with a position previously taken. The doctrine applies when it would be unconscionable to allow a person to maintain a position inconsistent with one to which he acquiesced, or from which he accepted a benefit. The court found that Reliant had not met its burden of proving that affirmative defense.

The judgment of the trial court was affirmed.

VI. Surface Use, Surface Damages, Condemnation and Environmental Cases

A. Court affirms finding that geophysical exploration company had

acquired the right to enter the surface and conduct testing activities.

The case of Kimzey v. Flamingo Seismic Solutions Inc.120 involved the appeal of a summary judgment ruling in favor of Flamingo finding that it had permission from the owners of the mineral rights and/or oil and gas leasehold rights to enter the surface of the subject property and conduct seismic testing. The District Court found that it is well-settled under Oklahoma law that an owner of mineral interests and/or oil and gas leasehold rights can validly grant a permit authorizing another person to conduct seismic exploration of the mineral estate. Thus, no trespass had occurred. The trial court further found that there is no support in the prior court decisions for the landowners’ assertion that there must be a benefit to the mineral estate in order for an owner to have authority to assign its right to conduct seismic operations. However, the

119 336 S.W.3d 764, at 789-90. 120 696 F.3d 1045 (10th Cir. 2012).

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court found that there was in fact a benefit to the mineral estate in the form of a greater potential for oil and gas development as a result of the seismic testing activities. When Flamingo moved for an award of attorneys fees, the landowners argued that, because the court found that there was no trespass, the court did not address the issue of the alleged injury to their land, with the result that the attorneys fee provisions of 12 O.S. §940(A) did not apply. The court rejected that argument and awarded attorney fees to Flamingo. The landowners appealed. In affirming the decision of the District Court, the Tenth Circuit Court of Appeals found in part as follows: 1. It agreed with the District Court that Oklahoma law clearly permits owners of mineral estates to grant access to the surface property in order to conduct seismic exploration. Among other authorities, the court cited Enron Oil & Gas Co. v. Worth121 for its finding that a “mineral owner may sever and assign the surface easement for the limited purpose of conducting geophysical exploration.” 2. The court noted that the Oklahoma Legislature recently confirmed this “historical right” through the enactment of 52 O.S. § 803, effective July 1, 2012, which provides in part:

“[T]he mineral owner has had, and shall hereafter continue to have, the right to make reasonable use of the surface estate, including the right of ingress and egress therefor, for the purpose of exploring, severing, capturing and producing the minerals underlying the tract of real property or lands spaced or pooled therewith.” [Section 803(A)] “It is the intent of this act to confirm the mineral owner’s historical right to make reasonable use of the surface estate, . . .” [Section 803(F)].

3. Citing Hinds v. Phillips Petroleum Co.,122 the Tenth Circuit rejected the landowners’ assertion that, while a mineral owner may assign its right to an oil and gas lessee, a lessee may not similarly assign its right. 4. The court also rejected the landowners’ contention that the court in Hinds conditioned the alienability of easements under an oil and gas lease on a benefit to the land. Moreover, the court found that the defendant’s actions in the present case were specifically for exploration and directly related to the mineral estate underlying the landowners’ surface estates. 5. The court found that Flamingo entered the surface of the property with the

121 1997 OK CIV APP 60, 947 P.2d 610, 613. 122 1979 OK 22, 591 P.2d 697, 699.

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express written consent of the owners of the leasehold interests, so not trespass occurred. To the extent that the landowners raised on appeal allegations that Flamingo made an unreasonable use of their land, the court declined to address those allegations since it found that the landowners did not raise that issue in the District Court. 6. Regarding the award of attorneys fees, Flamingo first argued that the appellate court lacked jurisdiction to review the award of attorneys fees because the landowners did not file a second notice of appeal after the district court’s fee award. However, the court found that the landowners, within 30 days of the order awarding fees, filed their opening brief in the first-noticed appeal of the summary judgment ruling and specifically challenged the fee award in that brief. The court found that it would be appropriate to construe the landowners’ brief as the functional equivalent of a notice of appeal from the order awarding fees since the brief provided all the forms of notice required by Fed. R. App. P. since the brief provided all the forms of notice required by Fed. R. App. P. 3(c)(1). 7. In rejecting the landowners’ argument that 12 O.S. §940(A) was inapplicable in this case because the District Court found that no trespass had occurred and, therefore, did not reach the issue of damages, the court cited several cases for the proposition that a defendant who successfully defends a property damage claim in entitled to an award of attorney fees under Section 940. B. Texas Supreme Court addresses the showings that must be made by

a common carrier in Texas in order to invoke a right of condemnation.

The case of Texas Rice Land Partners, Ltd. v. Densbury Green Pipeline-Texas, LLC,123 applied the restriction under the Texas Constitution against the use of eminent domain or condemnation to force the transfer or private property for a "private" use. Denbury, the entity that asserted a right of condemnation, was engaged in tertiary recovery operations involving the injection of CO2 into existing oil wells to increase production. Denbury desired to build a CO2 pipeline from the Jackson Dome in Mississippi to oil wells located in Texas. In applying with the Texas Railroad Commission to operate a CO2 pipeline in Texas, Denbury filed among other documents a Form T-4 on which it checked the box indicating that the pipeline would be operated as a "common carrier" line (rather than as a private line). Denbury also checked a box indicating that the pipeline would transport gas owned by others and transported for a fee. Eight days after Denbury filed its application, the Railroad Commission granted the T-4 permit and provided Denbury with a letter stating that it had made all of the then necessary filings to be classified as a common carrier pipeline for the transportation of carbon dioxide. Denbury subsequently

123 363 S.W.3d 192 (Tex. 2012).

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filed a tariff with the Commission setting out terms for the transportation of the gas in the pipeline. When Texas Rice Partners, the owner of interests in two tracts along the pipeline route, denied Denbury entry on the land to survey the property in preparation for condemning a pipeline easement, Denbury sued the surface owner for an injunction. On cross-motions for summary judgment, the trial court ruled in favor of Denbury, finding that it was a common carrier with the power of eminent domain. Texas Rice Partners appealed. The Texas Court of Appeals affirmed the decision of the trial court.124 In reversing the decision of the Court of Appeals and remanding the case to the district court for further proceedings, the Texas Supreme Court held that a T-4 permit alone does not conclusively establish status as a common carrier and confer the power of eminent domain. Rather, to qualify as a common carrier with the right of eminent domain, the pipeline must serve the public. The court found that if Denbury consumes all the CO2 in the pipeline for itself, it is not transporting gas for the public for hire. The court rejected Denbury's contention that merely making the pipeline available for public use is sufficient to confer common carrier status. Rather, to qualify as a common carrier "a reasonable probability must exist that the pipeline will at some point after construction serve the public by transporting gas for one or more customers who will either retain ownership of their gas or sell it to parties other than the carrier."125 The Texas Supreme Court stated that a permit granting common carrier status is prima facie valid. However, once a landowner challenges that status, the burden falls on the pipeline company to establish that it indeed transport "to or for the public for hire" if it wishes to exercise the power of eminent domain. After reviewing the facts that Denbury had offered in support of its status, the court held that there was an insufficient factual record to meet Denbury's burden in moving for summary judgment in its favor. The court remanded the case to the trial court for further proceedings. C. Common law tort claims of dairy farmers against a regulated power company were not barred under the filed rate doctrine or the primary jurisdiction doctrine. The case of Siewert v. Northern States Power Co.,126 two dairy farmers sued the defendant power company for damages and injunctive relief based on negligence, strict liability, trespass and nuisance. The plaintiffs contended that their dairy farm operations

124 Texas Rice Land Partners, Ltd. v. Densbury Green Pipeline-Texas, LLC, 296 S.W.3d 877 (Tex. App. – Beaumont 2009). 125 363 S.W.3d at 202. 126 793 N.W.2d 272 (Minn. 2011).

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were being damaged by stray voltage caused by an electric distribution system owned and operated by the power company. They alleged that, after they moved their 150 to 200 cows to the new farm location at issue in this lawsuit, the cows' milk production had declined, and the dairy herd also experienced health problems and unusually high death rates. After experiencing those problems, the farmers hired an electrician to test for stray voltage, and the electrician concluded that there was excessive voltage resulting from tests of the cows. The court explained that "[s]tray voltage is a phenomenon in which an electrical current—voltage that returns to the ground after powering an appliance—passes through an object not intended as a conductor, in this case, allegedly the Siewerts' dairy cows."127 This investigation led to the present lawsuit. The power company, being a regulated utility, moved for summary judgment relying in part on the contention that the filed rate doctrine and primary jurisdiction doctrine barred the dairy farmers' claims. Through a series of subsequent procedural steps, this issue was presented for decision by the Minnesota Supreme Court in the present case. The court noted that "[t]he filed rate doctrine is a judicially created doctrine that prevents courts from adjudicating private claims that would effectively vary or enlarge rates charged under a published tariff."128 With regard to the farmers' request for injunctive relief, the court found that the filed rate doctrine precluded any order of the court that would add terms to a tariff, so that the court could not order the power company to reconstruct the distribution lines or reduct or eliminate stray current. However, it found that court could order the power company to abate the nuisance created by stray current without directing the company as to the particular means by which it was to do so, without adding terms to the tariff or directing the scope of service to be provided. With regard to the farmers' request for damages, the court found that nothing in the applicable utility statutes showed any legislative intent to eliminate the right of an injured plaintiff to assert common law tort claims against electric distribution companies. The court concluded that the primary rate doctrine did not preclude the dairy farmers' claims for monetary damages or injunctive relief. The court then turned to the assertion of the primary jurisdiction doctrine as a bar to the plaintiffs' claims. The court noted that the primary jurisdiction doctrine "balances the expertise and subject matter of each branch of government involved to ensure that inherently judicial matters remain with the courts, while matters involving tariff interpretation and special expertise rest with respective agencies."129 The court that the common law tort claims presented in this case were inherently judicial and did not arise from the rate itself or from the reasonableness of the rate. The court held that the farmers' claims were not precluded by the primary jurisdiction doctrine.

127 Id. at 276. 128 Id. at 278. 129 Id. at 284.

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VII. Suits Over International Energy Operations

A. Claims for tortious interference and award of $66.5 million in actual damages in connection with failed oil and gas project in Bulgaria upheld on appeal.

Under the facts presented in Carlton Energy Group, L.L.C. v. Phillips,130 CBM Energy had entered into a contract with the government of Bulgaria in October of 2000 which permitted CBM to explore for natural gas on a large tract of land in Bulgaria. In order to obtain financing to fulfill its obligations under the Bulgarian concession, CBM entered into an agreement with Carlton on April 25, 2003 under which Carlton was to provide phased payments totaling $8 million in exchange for a large interest in the project. In an effort to obtain additional funding in the summer of 2004 to support its payment obligations, Carlton submitted a proposed agreement to Phillips under which Phillips would agree to pay $8.5 million in exchange for a 10% interest in the project. Phillips did not provide any funding to Carlton, and Phillips later asserted that, contrary to Carlton’s contentions, it never entered into a contract with Carlton. In particular, Phillips signed the proposed letter agreement and returned it to Carlton for it to sign and accept the agreement. Phillips asserted that Carlton never provided him with a counterpart signed by Carlton.

Carlton later learned that, in the Fall of 2004 during the period when Carlton was providing Phillips with technical data concerning the project during their negotiations, “Phillips and his representatives, without Carlton’s knowledge, were in direct contact with CBM about the Bulgaria Project.”131 Carlton alleged that Phillips was taking action to supplant Carlton’s position with CBM in relation to the project. In February 2005, EurEnergy, a company connected to Phillips, made a proposal to CBM and then entered into a joint development agreement under which EurEnergy provided funding to CBM for the project. As part of that contract, CBM agreed to declare Carlton in default of its obligations under the CBM/Carlton contract, and Carlton did so. “CBM and EurEnergy’s relationship subsequently subsequently soured, and litigation between CBM and EurEnergy ensued.”132 Bulgaria thereafter terminated the concession it had granted to CBM.

Based on the complex factual history described in the court’s opinion, Carlton

sued Phillips, EurEnergy and several other Phillips-related entities for tortious interference with the CBM/Carlton agreement, breach of contract and related claims. After a lengthy trial, the jury found that Phillips did in fact enter into the contract with

130 369 S.W.3d 433 (Tex. App. – Hous. 2012). 131 Id. at *3. 132 Id. at *4.

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Carlton and breached that contract. The jury awarded actual damages in the amount of $66.5 million. The jury further found that Phillips and EurEnergy intentionally interfered with the CBM/Carlton agreement, and that Carlton suffered $66.5 million in actual damages on that claim. The jury also awarded $8.5 million in punitive damages against Phillips and awarded the same amount against EurEnergy. The trial court, sua sponte, suggested a remittitur in the amount of $31.16 million, finding that the award of $66.5 million in actual damages was not supported by factually-sufficient evidence. The court, in its judgment on the jury verdict, awarded Carlton a reduced amount of $31.16 million in actual damages. The judgment assessed punitive damages in the amount of $8.5 million against Phillips, with the same award against EurEnergy. The defendants appealed.

In reversing the judgment of the trial court in part, the court of appeals first

concluded that Carlton had submitted ample evidence to support the jury’s conclusions with respect to the tortious interference claim. The appellate court also reviewed the expert testimony and other evidence presented at trial and concluded that, even though Carlton’s attorney suggested in closing argument that the jury award actual damages of $31.16 million, the jury’s award of $66.5 million was supported by the evidence.133 The trial court erred in requiring a remittitur from $66.5 million to $31.16 million, and that portion of the judgment was reversed. The court distinguished the prior Texas Court of Appeals decision in Ramco Oil & Gas Ltd. v. Anglo-Dutch (Tenge) L.L.C.,134 in which the court concluded that the proof of lost profits from a failed oil and gas project opportunity was largely speculative and did not prove the damages with required standard of reasonable certainty. The court noted that, unlike Ramco, the present suit was not a lost profits case.

B. Court finds that sovereign immunity compelled the dismissal of the

plaintiffs’ lawsuit against the Republic of Iraq, and that the “commercial activity” exception was not available under the facts presented.

In Terenkian v. Republic of Iraq,135 two Cyprus oil brokerage companies sued the

Republic of Iraq for the alleged breach of two contracts for the purchase and sale of Iraqi oil. The contracts were negotiated “under the auspices of the United Nations Oil for

133 The court distinguished the prior Texas Court of Appeals decision in Ramco Oil & Gas Ltd. v. Anglo-Dutch (Tenge) L.L.C., 207 S.W.3d 801 (Tex. App.-Hous. 2006), in which the court concluded that the proof of lost profits from a lost oil and gas project opportunity was largely speculative and did not prove the damages with reasonable certainty. The court noted that, unlike Ramco, the present suit was not a lost profits case. 134 207 S.W.3d 801 (Tex. App.-Hous. 2006). 135 694 F.3d 1122 (9th Cir. 2012).

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Food Program.”136 The plaintiffs asserted that, after the contracts had been signed by the Republic;s State Oil Marketing Organization (“SOMO”), Iraqui officials demanded that the plaintiffs pay additional fees that were not required under the contracts. When the plaintiffs refused to make the additional payments, SOMO unilaterally canceled the contracts. The plaintiffs alleged that they had been damaged by the actions of SOMO with the resulting loss of over $6 million in brokerage fees. In order to support the jurisdiction of the court without violating the Foreign Sovereign Immunities Act (“FSIA),137 the plaintiffs asserted, and the district court found, that the “commercial exception” to sovereign immunity provided in Section 1605(a)(2) of FSIA was applicable. That exception applies where a lawsuit is based on “an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.”138 The district court denied Iraq’s motion to dismiss. Iraq appealed.

The Ninth Circuit Court of Appeals concluded that the district court erred in

finding that the “commercial activity” exception allowed the court to proceed against Iraq and it reversed and directed the dismissal of the suit. The court found, among other considerations, that even if Iraq had executed the contract in the United States (a conclusion it found to be unsupported by the evidence), that fact alone was not sufficient to demonstrate a significant activity or a substantial contact in or with the United States for purposes of the first clause of Section 1605(a)(2). With regard to the judicial estoppel argument of the plaintiffs, the court held that “[e]ven if Iraq had conceded in other litigation that contracts made pursuant to the Oil for Food Program were commercial activities carried on in the United States,”139 a federal court must independently determine that it has jurisdiction, and judicial estoppels or concessions by the parties are not a substitute for subject matter jurisdiction. In an effort to support the exception under the third clause of Section 1605(a)(2), which requires a showing that the commercial activity of the foreign state causes a direct effect in the United States, the plaintiffs argued that some of the oil that was to be purchased was meant for the domestic market, and payment for all oil purchased was to be made by deposit into an account with a New York bank. The court concluded that these were only indirect effects and not the type of “direct effect” required under the third clause of Section 1605(a)(2).

136 Id. at 1126. 137 28 U.S.C. § 1602 et seq. 138 Id. at § 1605(a)(2). 139 694 F.3d at 1137.

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C. Court resolves dispute over the manner for selecting arbitrators for a three-party dispute under an arbitration clause that appeared to designed for only two-party disputes.

The case of BP Exploration Libya Ltd. v. ExxonMobil Libya Ltd.140 involved a

Drilling Services Agreement under which Noble agreed to provide drilling services to Exxon for deepwater oil wells to be drilled offshore in Libyan waters. Approximately one year after that agreement was signed, Exxon and BP entered into an Assignment Agreement under which “Exxon agreed to assign, and BP agreed to assume, the Drilling Agreement for the time necessary for BP to drill two deepwater wells in those Libyan waters.”141 Noble consented to the assignment. When disagreements later arose between all three parties (Noble, Exxon and BP) and Noble invoked contractual arbitration procedures, it became apparent that the applicable agreement to arbitrate was designed for two-party disputes. In particular, the agreement provided that disputes between Noble, Exxon and BP would be arbitrated “before three arbitrators appointed in accordance with the rules of the Arbitration and Conciliation Act 1990 (‘ACA’).”142 The rules of the ACA provide that where the agreement provides for three arbitrators to be selected, “each party shall appoint one arbitrator, and the two arbitrators thus appointed shall choose the third arbitrator,”143 or, failing an ability of the two to agree, the third arbitrator is to be appointed by the court.

When Noble served its arbitration demand on Exxon and BP, who had their own

disagreements as to which of them was liable for any sums due Noble, they each wanted to appoint their own arbitrator, which would have resulted in there being no neutral arbitrator. When efforts to reach an agreement on an alternative selection process failed, BP filed suit in the district court under, among other authority, a provision of the Federal Arbitration Act which gives courts certain rights to appoint arbitrators where the provisions of the agreement to arbitrate fail to provide an effective appointment procedure.144 BP proposed four alternative procedures to the court. The district court ultimately ordered that the three arbitrators that had been selected by the parties through their earlier communications would each serve, and that they should reach unanimous agreement on two neutral arbitrators, resulting in a panel of five arbitrators. If the three should be unable to agree on the two neutral arbitrators, the Secretary-General of the Permanent Court at The Hague would appoint the two neutral arbitrators. Noble appealed. On appeal, Noble argued that the district court erred in ordering a five-member panel when the contract provided for a three-member panel, and Noble asserted that Exxon and BP should be required to appoint a single arbitrator in spite of the differences that existed between those two parties. Noble also argued

140 689 F.3d 481 (5th Cir. 2012). 141 Id. at 484. 142 Id. at 485. 143 See Article 7(1) of the ACA Rules. 144 9 U.S.C. § 5.

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that the court did not have the authority to resolve the arbitrator selection dispute. At the outset, the Fifth Circuit Court of Appeals noted that no party sought to

submit the pending disputes to decision by the court rather than through arbitration. Rather, the sole relief sought was a judicial resolution of the parties’ impasse over the selection of the arbitrators. The court also found that a three-party dispute was not “unforeseen” under the Assignment Agreement because Exxon and BP had provided for the procedure to follow if Noble was also involved in a dispute with Exxon and BP.145 However, the court agreed with Exxon and BP that the contractually-specified arbitrator appointment process “has reached a ‘mechanical breakdown’ or lapse, thereby authorizing the district court to intervene under § 5.”146 With regard to the district court’s prescribed solution, the Fifth Circuit found that the district court erred in providing for a panel of five arbitrators when the agreement of the parties expressly provided for a three-member panel because Section 5 did not authorize the court to disregard express provisions of the agreement. The appellate court directed the district court to enter a new order appointing three arbitrators. In particular, the appellate court instructed the lower court to consider the approach of entering an order that would require BP and Exxon to select a second arbitrator to serve with the arbitrator appointed by Noble. If BP and Exxon cannot agree, the district court would appoint the second arbitrator. Likewise, if the two arbitrators are unable to agree on the selection of a neutral arbitrator, the court would select the third arbitrator. The district court was given the discretion to prescribe any alternative or modified method so long as it is consistent with the appellate opinion.

D. Court finds that series of prior lawsuits over the same subject matter precluded the plaintiffs’ present suit and that sanctions were appropriate.

The case of Grynberg v. Total Compagnie Francaise des Petroles,147 involved a

familiar factual backdrop that has been the subject of a series of prior lawsuits, some of which have been mentioned in prior annual editions of this report.148 Jack Grynberg and Pricaspian Development Company (“PDC”), the assignee of a substantial portion of the rights originally claimed by Grynberg in the subject matter of this lawsuit, sued the Total and Shell defendants. The plaintiffs contended that the defendants misappropriated Grynberg’s discovery that the Greater Kashagan Oil Field (“GKOF”) had significant potential for oil and natural gas production. They asked the court for judgment in the amount of twenty percent of the net profits earned from the production of oil and natural gas in the GKOF. The district court in this decision addressed the defendants’ motions

145 689 F.3d at 496. 146 Id. at 491. 147 2012 WL 4095186 (D. Del. 2012). 148 See 2012 WL 4095186 at *2-3 where the courts lists citations to some eight prior rulings of various courts that dealt with aspects of the controversy in this case.

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to dismiss. In an apparent effort to avoid a finding that the plaintiffs’ claims had already been

adjudicated in the prior lawsuits that involved the same subject matter, the plaintiffs amended their original complaint to drop each of their original causes of action and they instead asserted a due process claim and a claim under a general tort liability provision of the Civil Code of the Republic of Kazakhstan. With respect to the motions to dismiss those new claims, the court found that the claims were barred by a three year statute of limitations. The court additionally found that the doctrine of claim preclusion mandated the dismissal of the plaintiffs’ claims. With respect to the defendants’ request for sanctions, the court determined that the plaintiffs’ counsel did not have a reasonable basis to believe that the claims asserted in the original and amended complaints were warranted by existing law, or by a non-frivolous argument for extending, modifying or reversing existing law or establishing new law. It additionally ruled that the plaintiffs “abused the judicial process and acted in bad faith in filing the instant lawsuit.”149 The court awarded monetary sanctions against both the plaintiffs and their counsel.

The court faced similar issues in a second case, Grynberg v. BP P.L.C.150 That

case involved a suit by Grynberg and certain related entities against the BP defendants, Statoil and others. Before the court were motions to dismiss and other pending motions. The plaintiffs in this suit alleged several civil Racketeer Influenced and Corrupt Organization Act (“RICO”) violations by the defendants. The disputes between the parties arose from an alleged 1990 agreement and venture for exploration and production in Kazakhstan and the GKOF, litigation that commenced between the parties in 1993, settlement agreements reached in 1999, and a series of other lawsuits, arbitrations, transactions and events that followed over subsequent years.

Among other rulings, the court determined that, under the transactional test for

determining whether the present lawsuit involved the same claims as the proceedings from prior years, the court found that the claims brought by the plaintiffs in the present lawsuit were the same claims as those addressed in arbitration proceedings that were commenced in 2002, decided by the arbitrator in 2010 and addressed on appeal in 2012. Accordingly, the court concluded that the present suit was precluded by the doctrine of res judicata and should be dismissed.

E. Based upon the doctrine of forum non conveniens, court finds that negligence suit filed in the Texas courts should be dismissed and refiled in the courts of Peru.

The case of In re BPZ Resources, Inc.151 involved an explosion on a Peruvian-

149 Id. at 17. 150 855 F.Supp.2d 625 (S.D. Tex. 2012). 151 359 S.W.3d 866 (Tex. App. – Hous. 2012).

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flagged oil tanker that occurred off the coast of Peru which led to the deaths of two crew members and injuries to several more. At the time of the explosion, the tanker was moored near the CX-11 crude oil platform owned by BPZ Peru, a Peruvian company. BPZ Energy, a Texas company, was the parent of BPZ Peru. BPZ Resources, Inc. a Texas company, was the parent of BPZ Energy. Several crew members and their family sued BPZ Resources and BPX Energy in the District Court of Harris County, Texas for negligence, including wrongful death and survival claims, and sought damages under general maritime law. The court observed that

[plaintiffs’] theory of the case revolves around decisions made in Houston to step up production on the CX-11 platform. [Plaintiffs] allege that relators made decisions to step up production, which required storage of more oil on the [tanker] that it was equipped to handle. . . They allege this is the true cause of the explosion.152 The defendants moved to dismiss the suit on the basis of the inconvenient forum

doctrine on the grounds that the suit was brought by residents of Peru, it concerned an incident in the territorial waters of Peru, it involved a Peruvian tanker, Peruvian law would apply, witnesses could not be compelled to travel to the Texas courts and other legal proceedings relating to the incident were already pending in Peru. The district court denied the defendants’ motion. The defendants, as relators, petitioned the Texas Court of Appeals for a writ of mandamus compelling the district court to grant their motion.

The appellate court engaged in a detailed review of the legal standards for the dismissal of a case under the doctrine of forum non conveniens as codified in Texas,153 and as it related to the facts in this case. The court observed that the first requirement is that an alternate forum exist in which the claim or action may be tried. Under controlling case law, “[a]n alternate forum does not provide an adequate remedy if the remedies it offers are so unsatisfactory they comprise no remedy at all.”154 The plaintiffs asserted, among other arguments, that the Peruvian courts provided an inadequate alternative forum because (a) Peru was unsafe due to political unrest, (b) the country’s judicial system was corrupt, (c) the Peruvian legal system does not allow for deposition or provide compulsory process, (d) the parties would be limited to three witnesses for each controverted fact, and (e) a person who has an interest in a lawsuit may not serve as a witness. The court reviewed the evidence presented and concluded, among other things, that the plaintiffs “have not presented evidence that the Peruvian judicial systems is so

152 359 S.W.3d at 871. 153 Texas Civil Practice and Remedies Code, Section 71.051. 154 In re Gen. Elec. Co., 271 S.W.3d 681, 688 (Tex. 2008).

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corrupt as to effectively provide them with no remedy at all.”155 After reviewing the relationship of the claims, the underlying incident and the parties to both Peru and Houston, and after reviewing the other factors to be considered under Texas procedure in ruling on a motion to dismiss based upon forum non conveniens, the court conclude that “[t]he trial court’s denial of the relators’ motion to dismiss violated section 71.05(b) and was an abuse of discretion.”156 The court conditioned its ruling on the acceptance of jurisdiction by the Peruvian courts.

F. Court affirms order dismissing case for lack of personal jurisdiction. The case of Grynberg v. Ivanhoe Energy, Inc.,157 in volved a lawsuit filed by Jack

J. Grynberg, Cotundo Minerals, S.A., an Ecuadaorian company, RSM Production Corporation (whose president was Grynberg) and Archidona Minerals, S.A. Cotundo held seventeen mining concessions from the Republic of Eduador wich gave Contundo “the exclusive right to explore and produce oil from nearly 200,000 acres in the Pungarayacu Heavy Tar Sands Oil Deposit for thirty years.”158 Grynberg contacted Ivanhoe Energy regarding the Pungarayacu prospect and provided Ivanhoe with proprietary and confidential information that included Grynberg’s estimates of the oil deposits in the Pungarayacu. Ivanhoe, in turn, sent Grynberg information concerning its oil processing technology. After continued discussions, it became apparent that the parties would not be reaching an agreement to develop the Pungarayacu, so Grynberg requested that Ivanhoe return the confidential information. The plaintiffs later learned that representatives of Ivanhoe subsequently pursued discussions directly with Ecuadorian officials, and an Ivanhoe affiliate ultimately signed a contract with the government to develop the Pungarayacu. In the same time frame, Ecuador declared the mining concessions of Cotundo as expired.

The plaintiffs alleged that Ivanhoe and its affiliates took the plaintiffs’ confidential

information under false pretenses, made false representations and interfered with the plaintiffs’ property interests. The plaintiffs further suggested that Ivanhoe may have used improper means to persuade Ecuador to revoke their concessions and award them to Ivanhoe. The present lawsuit was filed in United States District Court for the District of Colorado, asserting claims of fraud, intentional and tortious interference with prospective unique business advantages, unjust enrichment, civil conspiracy and violations of RICO laws. Upon the motion of the defendants, the district court dismissed this action without prejudice for lack of personal jurisdiction and denied the alternative motion of the plaintiffs to transfer the case to the federal courts of California where Ivanohoe’s plant was located. The plaintiffs appealed.

155 359 S.W.3d at 875. 156 Id. at 881. 157 2012 WL 2855777 (10th Cir. 2012). 158 Id. at *1.

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The Tenth Circuit Court of Appeals affirmed the district court’s decision and found that the plaintiffs had failed to establish either general jurisdiction or specific jurisdiction in Colorado over the defendants. In likewise upholding the denial of the plaintiffs’ alternative motion to transfer the suit to California, the court reviewed the factors to be considered in determining whether to dismiss a suit rather than transfer it. The court noted that the district court had found “that the parties agree that Plaintiffs action would not be time barred if filed in another district.”159 However, the plaintiffs asserted that eighteen months had passed since the filing of the motion to transfer and that there was a substantial risk that the claims would be time-barred in California if a new lawsuit had to be filed. The appellate court indicated that its role was to review the ruling made by the district court based on the circumstances presented at the time it ruled, and not based on changes in circumstances that occurred after that ruling. The court further noted that the interests of the plaintiffs could have been protected by filing a protective lawsuit in California after the district court in Colorado dismissed the case. The plaintiffs additionally argued that the dismissal of their action and denial of the motion to transfer caused prejudice to the plaintiffs by exposing them to the defendants’ motion for more than $800,000 in attorneys’ fees and costs. However, the court that this was not the type of prejudice that is of concern under the federal transfer statute.160

G. Court affirms dismissal of RICO claims against arbitration counsel. In RSM Production Corp. v. Freshfields Bruckhaus Deringer U.S. L.L.P.,161 RSM,

whose chief executive officer was Jack Grynberg, had obtained an exclusive agreement with the nation of Grenada for the exploration, production and development of oil and gas. RSM alleged that, after the agreement was executed, a key official for Grenada advised that “he expected significant bribe payments from RSM and Grynberg in order for RSM and Grynberg to do business in Grenada,”162 but they refused to make such payments. The years that followed involved a complex series of factual and procedural events that led to growing disagreements between RSM and Grenada and included an arbitration over the propriety of Grenada’s denial of RSM’s offshore license application. Freshfields served as arbitration counsel for Grenada. The arbitration panel ultimately ruled that the license application submitted by RSM to Grenada was untimely.

In the present lawsuit, RSM alleged that Freshfields “was part of a conspiracy to

bribe Genadian officials and deny RSM its offshore licensing rights,”163 and asserted that that the firm had specifically conspired to violate the Racketeer Influenced and Corrupt Organizations Act (“RICO”).164 The district court granted Freshfields’ motion to

159 Id. at *18. 160 28 U.S.C. § 1631. 161 682 F.3d 1043 (D.C. Cir. 2012). 162 Id. at 1046. 163 Id. at 1047. 164 18 U.S.C. § 1962(d).

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dismiss under Rule 12(b)(1) on the grounds that the complaint was barred by res judicata in view of prior proceedings in New York.165 RSM appealed, arguing that Freshfields was not in privity with the defendants in the New York litigation. The appellate court affirmed the district court on a different basis. The appellate court found that RSM’s complaint alleged “no conduct by Freshfields beyond the provision of normal legal services in arbitration and so fails to support a reasonable inference that Freshfields ‘agree[d] to assist others in the commission of unlawful acts.’”166

VIII. Other Energy Industry Cases

A. Court Addresses Lawsuit by Clients and Their Attorneys Against Expert Witness for Negligence and Breach of Contract in the Performance of the Duties of the Expert Witness in a Lawsuit Alleging Groundwater Pollution as a Result of Oilfield Waste Disposal.

Without attempting to describe the lengthy and complex factual and procedural history of this case in detail, those involved in either expert witness work or a litigation practice may want to note for future reference the case of Ellison v. Campbell.167 In that lawsuit, the plaintiffs had previously alleged in a separate lawsuit that the defendants were responsible for causing pollution of the groundwater on the Ellisons’ property. Campbell was hired to serve as an expert witness for the plaintiffs. The plaintiffs and their attorneys in that prior lawsuit alleged in the present action that the defendant expert witness had been negligent, had breached his contractual obligations and in fact had tortuously breached its contract in the course of performing as an expert witness in the prior underlying pollution lawsuit. The plaintiffs alleged that, as a result of the defendant’s performance, they were required to settle the pollution lawsuit for far less that the actual value of that case. The defendants asserted counterclaims for declaratory judgment, breach of contract and unjust enrichment.

The trial court granted the defendants’ motion to dismiss the negligence and

tortious breach of contract claims. The case proceeded to jury trial in 2010. At the conclusion of the trial, and based on the jury’s verdict, the trial court entered a judgment finding in favor of the plaintiffs and against the defendants in the amount of $408,748.68, plus statutory interest, on the breach of contract claim. The defendants appealed.

In a 2-1 decision, the Oklahoma Court of Appeals found that the trial court erred

165 RSM Prod. Corp. v. Fridman, 643 F.Supp.2d 382, 390 (S.D.N.Y. 2009, aff’d 387 Fed. Appx. 72, 75 (2d Cir. 2010). 166 682 F.3d at 1051. 167 84 Okla. Bar J. 1986 (Okla. App. 2013 - #108,468).

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in not requiring the plaintiffs to present an expert witness to refute the defendant Campbell’s own expert testimony and to establish that the defendants’ actions constituted a breach of contract. Rather than presenting a like scientific expert to counter Campbell’s testimony, the plaintiffs presented as witnesses (a) one of the defense attorneys from the underlying pollution lawsuit who testified that Campbell’s expert report did not make sense, that Campbell was unable to support the report at his deposition, and that the Ellisons’ pollution lawsuit was in serious trouble after Campbell’s deposition, and (b) one of the plaintiff attorneys from the present lawsuit and the underlying pollution lawsuit who

B. Reserve pits used in commercial oil development are found to be outside the reach of the Migratory Bird Treaty Act.

In United States v. Brigham Oil and Gas, L.P.,168 the government had initially charged seven oil and gas companies with violations of the Migratory Bird Treaty Act ("MBTA").169 Three of the companies entered into plea agreements and the charges against one of the companies were dismissed by the government. Brigham, Newfield and Continental Resources proceeded to defend the charges filed aginst them and they moved the court to dismiss the indictments against them for violations of the MBTA. As to all three defendants, the indictments were based upon the discovery of dead migratory birds near the companies' reserve pits in North Dakota. The court found the reserve pits were not directed at migratory birds or their habitats, and that the pits had little effect on bird habits "except to attract occasional birds which mistake the pits for a pond or lake."170 The court ruled that "the use of reserve pits in commercial oil development is legal, commercially-useful activity that stands outside the reach of"171 the MBTA, and it granted the three defendants' motions to dismiss.

C. Court addresses Petitioner’s object to ex parte communications between hearing officer in administrative hearings and state and federal agencies involved in the proceeding.

The court in Arbuckle Simpson Aquifer Protection Federation of Oklahoma, Inc.

v. Oklahoma Water Resources Board,172 was presented with a request for a writ of prohibition and mandamus seeking disqualification of a hearing officer in administrative proceedings before the Oklahoma Water Resources Board (OWRB). The OWRB had made a tentative Maximum Annual Yield determination with respect to the Arbuckle

168 840 F.Supp.2d 1202 (D. N.D. 2012). 169 16 U.S.C. §§ 703 and 707(a). 170 840 F.Supp.2d at 1211. 171 Id. 172 2013 OK 29, ___ P.3d ___.

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Simpson Aquifer. Pursuant to 82 O.S. §1020.6, once the OWRB reached its tentative finding, it was required to hold hearings so that any interested parties would have the right to present evidence in support of, or opposition to, the OWRB’s determination.

Pursuant to OAC § 785:4-3-4, the OWRB appointed a hearing examiner to supervise, direct, preside over and conduct the hearing. Under applicable procedures, once the hearings are completed, the hearing examiner makes a recommendation to the OWRB, which then proceeds to make a final determination of the maximum annual yield by issuing a final order with findings of fact and conclusions of law.

The Petitioner asked the court to disqualify the hearing examiner and to restart

the proceedings with a new hearing examiner, and to prohibit ex parte communications between the hearing examiner and the OWRB and other agencies. The Petitioner contended that the hearing examiner was involved in several post-hearing ex parte communications with adverse parties, including representatives of the OWRB and the United States Geological Survey. The evidence presented to the court indicated that the hearing examiner acknowledged (a) speaking by phone with the OWRB’s General Counsel to inquire about assistance from the OWRB’s staff in locating evidence contained in the record on certain issues, (b) communicating with the OWRB’s Staff Attorney to obtain assistance in locating evidence, and (c) that she received information from the USGS which was forwarded to her by the OWRB’s General Counsel concerning a hydrology study in the area in question.173 As to the third category, the court noted that the fact that the hearing examiner did not solicit the information did not change the fact that an ex parte communication occurred indirectly between USGS employees who appeared as witnesses in the proceedings and the hearing examiner.

In addressing this request for relief, the court first observed that Article II of the Administrative Procedures Act specifically prohibits ex parte communications by members or employees of an agency assigned to render a decision or make findings of fact or conclusions of law in an individual proceeding. Participants in hearings governed by Article II of the Act are also guaranteed a fair and impartial hearing or consideration. However, the court went to reach the following conclusions: 1. The OWRB was not a “party” to the proceedings. Rather, the OWRB is the agency holding the proceedings. As a result, communications between the hearing examiner with the OWRB were not covered by the ex parte communications prohibitions of 75 O.S. §313. 2. However, the court found that the hearing officer’s communications with outside federal agencies such as the USGS were another matter. The ex parte communications between the hearing officer and other agencies serving as witnesses, passed to the hearing officer through the OWRB, created the impression of partiality.

173 Id. at ¶5.

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Because agencies and their representatives function much like a court when conducting adjudicative proceedings, they are bound by minimum standards of due process.174 3. The court found that, to “have the OWRB, which is not a party to the proceedings and thus permitted to communicate with the hearing officer, acting as a conduit for favorable witnesses to present further unchallenged testimony to the hearing officer without notice to the other parties allows one to question the hearing officer’s impartiality. . . If post-hearing communications from the USGS and other agencies about the record wre necessary, then notice and an opportunity for all parties to participate should have been provided.”175 The court issued a writ of mandamus compelling the hearing officer to provide notice of her ex parte communications to all parties to the proceedings, and to disclose the contents of those communications to the parties and incorporate those communications and responses to them in the record. Justices Taylor and Winchester dissented from the opinion and stated that they would have denied all relief sought by the Petitioner. Justice Watt concurred with the granting of the writ but dissented from the denial of the request for disqualification of the judge, citing the court’s prior disqualification of a trial judge under similar circumstances in the case of Miller Dollarhide, P.C. v. Tal.176

D. Rulings entered in the litigation concerning the Deepwater Horizon oil spill in the Gulf of Mexico in 2010.

Over the past year, litigation continued in relation to the oil spill that began on April 20, 2010 at the Deepwater Horizon rig in the Gulf of Mexico. The court in In re Oil Spill by the Oil Rig "Deepwater Horizon" in the Gulf of Mexico, On April 20, 2010, 177 was presented with cross-motions for partial summary judgment concerning the extent of BP’s obligations to indemnify and defend Transocean with regard to pollution claims of third parties. Transocean contended that its drilling contract with BP required BP to defend and indemnify Transocean “from claims and liabilities related to pollution originating below the surface of the water, even if Transocean is strictly liable or the pollution was caused by Transocean’s negligence or gross negligence,”178 and that the obligation included punitive damages and penalties. BP asserted, inter alia, that Transocean’s interpretation of its indemnity obligation would run afoul of applicable public policy and law that “prohibits and invalidates a contractual indemnity that purports

174 Johnson v. Bd. Of Governors of Registered Dentists of State of Oklahoma, 1996 OK 41, ¶32, 913 P.2d 1339. 175 2013 OK 29 at ¶13. 176 2007 OK 58, ¶20, 163 P.3d 548. 177 841 F.Supp.2d 988 (E.D. La. 2012). 178 Id. at 992.

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to include gross negligence,179 punitive damages, or CWA civil penalties.”180 The parties agreed that maritime law governed the drilling contract. The court held that, subject to certain stated conditions,

BP is required to indemnify Transocean for compensatory damages asserted by third parties against Transocean related to pollution that did not originate on or above the surface of the water, even if the claim is the result of Transocean’s strict liability . . . negligence, or gross negligence. . . . BP does not owe Transocean indemnity to the extent Transocean is held liable for punitive damages. . . BP does not owe Transocean indemnity to the extent Transocean is held liable for civil penalties under Section 311(b)(7) of the CWA.181

In In re: Oil Spill by the Oil Rig "Deepwater Horizon" in the Gulf of Mexico, on April 20, 2010,182 the court was presented with cross-motions for partial summary judgment regarding the liability of the BP, Anadarko and Transocean entities under the Oil Pollution Act of 1990 (“OPA”) and the Clean Water Act (“CWA”). The court ruled that, because the Deepwater Horizon

was being used as an offshore facility at the time of the incident, BP and Anadarko, co-lessees of the area in which the offshore facility was located, are responsible parties with regard to the discharge of oil that occurred beneath the surface of the water. Transocean, as owner/operator of the [mobile offshore drilling unit], is not a responsible party under OPA for the discharge that occurred beneath the surface of the water (though it may be liable for removal costs under Section 1004(c)(3)). Liability for OPA removal costs and damages is joint and several vis-á-vis BP and Anadarko and the subsurface discharge.183

The court additionally found that BP and Anadarko were “liable for civil penalties under Section 311(b)(7) of the CWA . . . because they are both owners of the offshore facility from which oil discharged.”184 However, because there were disputed facts as to whether Transocean met the definition of an “operator” of the offshore facility, the court could not determine its liability through a summary judgment procedure.

179 The court observed that article 25.1 of the drilling contract expressly provided for “indemnification for liabilities caused by [Transocean’s] gross negligence.” Id. at 998-99. 180 Id. at 992. 181 Id. at 1009. 182 844 F.Supp.2d 746 (E.D. La. 2012). 183 Id. at 755-56. 184 Id. at 761.

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In re BP P.L.C. Securities Litigation185 involved seven consolidated securities class actions in which it was alleged, among other things, that during the years leading up to the Deepwater Horizon incident, repeated misrepresentations and omissions on the part of BP “conceal[ed] the true state of BP’s safety programs and the Company’s risk exposure and [kept] the value of BP ADSs [American Depositor Shares] artificially inflated.”186 The plaintiffs asserted that they lost “a substantial portion of their investment when the true state of BP’s operations was revealed, tragically, through the Deepwater Horizon catastrophe and subsequent oil spill.”187 The defendants in the suits were BP plc and BP America, Inc. and nine of their present and former officers and directors. The plaintiffs alleged violations of section 10(b) of the Securities and Exchange Act of 1934.

In this ruling, the court addressed the defendants’ Motion to Dismiss the Claims

of the BP ADS Purchasers in the Ludlow Plaintiffs’ Consolidated Class Action Complaint. In a lengthy order that reviewed the requirements of the applicable securities laws, the court concluded that the motion to dismiss should be granted. The court allowed the plaintiffs twenty days within which to file an amended complaint in conformity with the court’s order if they wished to do so.

On the same date and in the same consolidated actions,188 the court also ruled on the defendants’ Motion to Dismiss the Claims of BP ADS Purchasers in the New York and Ohio Plaintiffs’ Consolidated Class Action Complaint and on the Motion to Dismiss the Claims of Purchasers of BP Ordinary Shares. Those motions involved claims against BP plc, BP America, Inc. and BP Exploration & Production, Inc. and ten of their present and former officers and directors. The New York and Ohio plaintiffs asserted violations of section 10(b) of the Securities and Exchange Act of 1934, rule 10b-5 of the Securities and Exchange Commission, and section 20(a) of the Exchange Act, and also pled claims under New York common law and English law. The court observed that “[f]rom the date of the Deepwater Horizon explosion through May 28, 2010 . . . BP’s securities fell in value by 48%, wiping out over $91 billion in market capitalization, and causing Plaintiffs to lose as much as 40% of their investments.”189 After a very lengthy discussion of the issues presented and the pertinent allegations, the court found that the plaintiffs had adequately pled section 10(b) violations by BP plc, BP America, BP Exploration & Production, Anthony Hayward and Douglas Suttles, and also adequately pled control person liability under section 20(a) as to the defendants Hayward and Suttles. The motions to dismiss were granted in other respects. The court also dismissed a suit by nine individual participants and beneficiaries

185 852 F.Supp.2d 767 (S.D. Tex. 2012). 186 Id. at 774. 187 Id. 188 In re BP P.L.C. Securities Litigation, 843 F.Supp.2d 712 (S.D. Tex. 2012). 189 Id. at 724.

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of four BP employee investment and savings plans regulated by ERISA.190 The court additionally granted in part and denied in part motions to dismiss a series of complaints filed by certain coastal parishes in Louisiana, four cities in Alabama, three states from the United Mexican States, and various local government entities who joined in a Local Government Entity Master Complaint.191

E. Suits related to the Deepwater Horizon oil spill filed by plaintiffs alleging that the defendant companies used their contributions in dealing with the incident but did not compensate them.

The oil spill that began in April 2010 at the Deepwater Horizon rig in the Gulf of

Mexico gave rise to lawsuits of many forms related to the direct impacts and consequences of the incident itself. However, the litigation fallout from the tragic event also extended into disputes over certain collateral issues. One such area of litigation involved plaintiffs who alleged that they provided services or intellectual property in connection with the defendant companies’ effort to halt and remediate the oil spill, with the plaintiffs alleging they were not paid for their services or ideas. Additionally, those who were already developing and promoting technologies for oil spill remediation, who made efforts to avail themselves of the business opportunities afforded by this high profile incident, landed in a lengthy jury trial involving two well-known Hollywood stars.

Indeed, when a company confronted with a disaster on the scale of the Deepwater Horizon oil spill receives some 123,000 volunteered suggestions192 from the public as to how the company might address and remedy the spill, it should come as no surprise that differing perceptions can follow as to which of the suggestions were in fact used, and whether any compensation should be paid for the proffered ideas. The remedial efforts associated with the Deepwater Horizon oil spill have led to several lawsuits in which the plaintiffs asserted that they were not fairly compensated for their contributions to those efforts.

In Richards v. British Petroleum,193 Richards filed a pro se complaint alleging that she provided BP with ideas for containing the flow of oil and cleaning up the oil that was released and that BP, Halliburton, Transocean, Cameron and the Gulf Coast Claims Facility had used her intellectual property without compensating her for it. The proposals the plaintiff allegedly provided for how to address the oil spill included, among others:

190 In re BP P.L.C. Securities Litigation, 866 F.Supp.2d 709 (S.D.Tex. 2012). 191 In re Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico, on April 20, 2010, 835 F.Supp.2d 175 (E.D. La. 2011) (decided December 9, 2011). 192See Suzanne Goldberg, BP Bought Kevin Costner’s Oil Spill Clean-up Machines – Despite Field Test Failure, The Guardian (July 12, 2011, 08:30 EDT), www.guardian.co.uk/environment/2011/jul/12/bp-kevin-costner-deepwater-horizon-spill. 193869 F. Supp. 2d 730 (E.D. La. 2012).

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(1) plugging the leak using a combination of materials, (2) placing a giant plunger on the well, (3) using a vinegar solution to clean up the spill, (4) the use by BP of spiritual terms to inspire confidence and respect for the American people, . . . (7) an email to Kenneth Feinberg concerning the drilling of a hole and siphoning of oil.194

After examining Richards’ complaint and amended complaint, the court found that the plaintiff’s claims were “implausible due to the dearth of factual matter therein. The Court is unable to draw an inference that any of the named defendants are liable for the alleged patent and copyright infringement and theft of intellectual property.”195 The court granted the defendants’ motions to dismiss. The plaintiff in Southeast Recovery Group, LLC v. BP America, Inc.,196 sued for breach of contract and sought to recover more than $1 million for helicopter services allegedly provided to BP in connection with the Deepwater Horizon incident. BP pled fraud among its defenses to this claim. The United States moved to intervene in the case and sought a stay of the proceedings “on grounds that it is currently conducting an active criminal investigation, including grand jury proceedings, concerning the same transaction.”197 The court noted that BP, who was a potential victim of any criminal fraud identified through the criminal proceedings, did not oppose the government’s motion. Subject to a series of conditions described in its ruling, the court allowed the government to intervene and stayed the civil proceedings pending the outcome of the criminal investigation. The case of Stanwood Boom Works, LLC v. BP Exploration & Production, Inc.,198 involved a series of emails, negotiations, proposals and counter-proposals in June and July of 2010 concerning the contractual specifications and purchase price for an oil containment boom that Stanwood proposed to sell to BP. When the communications ended without a purchase of the containment boom from Stanwood, it sued BP asserting claims of breach of contract and promissory estoppel. In affirming the district court’s ruling in favor of BP, the Fifth Circuit concluded that “BP’s purchase order was not an offer because BP’s signature, after Stanwood’s assent, was a condition precedent to contract formation.”199 Even if BP’s purchase order were to be considered an offer, the court found that Stanwood’s response was not an acceptance. The court likewise found against Stanwood on its claim of promissory estoppel, noting that BP had promptly advised Stanwood that the purchase order was on hold due to the

194Id. at 733. 195Id. at 737. 196278 F.R.D. 162 (E.D. La. 2012). 197Id. at 165. 198476 Fed. App’x 572 (5th Cir. 2012). 199Id. at 575.

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inability to obtain BP management approval. In Vann v. British Petroleum Oil Co.,200 the court denied Vann’s appeal of the trial court’s order dismissing without prejudice “his suit alleging that the defendants violated his civil rights when they failed to financially compensate him after he submitted to them, and they used, his plans for a device designed to stop the Deepwater Horizon oil spill.”201 The plaintiff moved for leave to proceed in forma pauperis on appeal. After reviewing the procedural history showing that the plaintiff had made little effort in the proceedings below to respond to the requests for additional information regarding his claims, the court dismissed the appeal as frivolous.

F. Hollywood intersects with the Deepwater Horizon oil spill. Actors Kevin Costner and Stephen Baldwin, among others, were adversaries in a real life lawsuit that proceeded to a nine-day jury trial in federal court in New Orleans in June 2012. The case was styled Contogouris v. Westpac Resources, LLC.202 Stephen Baldwin was the co-plaintiff and Kevin Costner was among the co-defendants. Since the mid-1990s, Costner received occasional publicity with respect to his investment in, and promotion of, novel technology designed to clean-up oil spills, but that venture had experienced mixed results. On April 20, 2010, the Deepwater Horizon oil spill commenced in the Gulf of Mexico. As a result of negotiations that followed in the aftermath of that incident and continuing through mid-May, Costner (through his entity WestPac Resources), Baldwin and several other parties invested in and formed Ocean Therapy Solutions, LLC (OTS) to market the unique oil spill clean-up technology generally, and to promote the use of that technology by BP in particular.203 After forming OTS, Costner and other representatives and contractors of OTS promptly made contacts with BP to market the technology for use in the ongoing oil spill. By virtue of the lengthy chronology of communications and events detailed in the often-conflicting assertions of the litigants, certain of the members of OTS soon proposed that a "cash call" be made that would have required Baldwin and his co-plaintiff to invest an additional $1.18 million in OTS, with uncertainty as to the purposes for which the additional money would be used. Costner and Smith (one of Costner's primary associates in the OTS venture) were alleged to have pushed for the cash call up to the point when, on June 11, 2010, Baldwin and Contogouris agreed to sell their interests and signed transfer agreements agreeing to transfer their interests to Smith or

200451 F. App’x 404 (5th Cir. 2011). 201Id. at 405. 202No. 10-4609, 2012 WL 3017521 (E.D. La. 2012), appeal docketed No. 12-30870 (5th Cir. Feb. 4, 2013). 203Pre-Trial Order at 6-14, Contogouris v. Westpac Res., LLC, No. 10-4609 (E.D. La. Apr. 13, 2012) (summary of plaintiffs’ factual allegations and factual background).

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his designee. In the present lawsuit, which was filed in December 2010, Baldwin and Contogouris alleged, among many other assertions, that the "cash call" was a sham that never occurred and was calculated to pressure the plaintiffs to sell their interests in OTS before the company realized the profits from anticipated transactions with BP. The plaintiffs asserted that the defendants led them to believe that BP had made no agreements to purchase OTS's product at the time plaintiffs agreed to sell their interests, and that plaintiffs only later learned that BP had, days earlier, placed an order for 32 units, which substantially contributed to over $30 million in distributions to the members of OTC between July and December 2010. Costner and the other defendants responded with many counter-allegations, including that they had no duty to disclose the alleged information to the plaintiffs, that the plaintiffs possessed actual or constructive knowledge of the facts they alleged were misrepresented and/or omitted by the defendants, and that the transfer documents included a waiver and release of their claims. At the conclusion of the trial, the jury reached a verdict in favor of the defendants and against the plaintiffs.204

G. Court affirms the dismissal of action seeking to appeal County Assessor’s valuation of drilling rig and other oil field equipment.

In Cactus Drilling Co. v. Hefley,205 the County Assessor of Coal County had valued a drilling rig and other oil field equipment of Cactus that was located in the county. Cactus appealed the assessment to the County Board of Equalization, which affirmed the Assessor’s valuation. Cactus then commenced the present lawsuit in the District Court for Coal County seeking further review of the assessment which it contended placed too high of a value on its property. In order to initiate the effort to obtain further review, Cactus filed a “Petition [for] De Novo Appeal with the District Court on July 9, 2008. Plaintiff attached to that petition a “Notice of Appeal” addressed to the County Clerk. On December 30, 2008, by check dated two days earlier, Cactus paid the assessed tax and alleged that its payment was accompanied by a Form 990 “Payment of Taxes under Protest Due to Pending Appeal. However, the employees of the County Treasurer’s office testified that Cactus’ payment was not accompanied by either a Form 990 (Notice of Payment Under Protest) or a copy of the Plaintiff’s Petition for De Novo Appeal as required by 68 O.S. §2884(B). The County Assessor and other county defendants moved to dismiss Cactus’

204Contogouris v. Westpac Res., No. 10-4609, 2012 WL 3017521 (E.D. La. July 23, 2012) (verdict filed June 14, 2012). 205 2012 OK CIV APP 101, 290 P.3d 284.

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Petition on the ground that 68 O.S. §2884(B) required that Cactus (a) give notice of its protest of the assessment on a prescribed form at the time of payment of the tax, and (b) attach to the notice of protest the petition for review that it filed in the District Court. Since Cactus had taken neither of those required steps, the County defendants asserted that the trial court lacked subject matter jurisdiction to hear Cactus’ appeal. Cactus responded with the assertion that the case had been on file for almost two years, the parties had proceeded with preparations toward the trial date, and the County defendants suffered no prejudice from Cactus’ failure to attach its protest form to the Petition that it filed. The trial court granted the motion to dismiss. Cactus appealed. In affirming the trial court’s finding that it lacked subject matter jurisdiction and the court’s dismissal of Cactus’ lawsuit, the Court of Appeals noted the applicable statutes relied upon by the County defendants and stated: “The legislature has specified in §2884(B) when and how the notice of protest must be given. The language of the statute leaves no room for substantial compliance. Failure to notify the county treasurer of the payment of tax under protest with a copy of the petition for review attached as required by §2884(B) deprives the court of subject matter jurisdiction to act.”206

206 Id. at ¶16.