Last Friday, the Supreme Court of Texas issued decisions in two companion cases, No. 05-1076; Exxon Corp., et al. v. Emerald Oil & Gas Co., et al. (“Miesch”), and No. 05-0729; Exxon Corp., et al. v. Emerald Oil & Gas Co. (“Emerald”).  Butch Marseglia, counsel in Liskow & Lewis’s Houston office, submitted a brief in the Miesch case for the Texas Oil & Gas Association (“TxOGA”) as amicus curiae.

 

In Emerald, the Court held that Section 85.321 of the Texas Natural Resources Code creates a private cause of action, but it does not extend to a subsequent lessee against a prior lessee for damages to the subsequent lessee’s interest.  Because the plaintiff Emerald owned no interest in the mineral leases when the prior lessee allegedly damaged the interest, the plaintiff lacked standing to assert the cause of action the Court recognizes under Section 85.321.  The Court also held that Emerald also lacked standing to bring a claim against its prior lessee based on negligence per se.

 

In Miesch, the Court held that statutory and common law waste, negligence per se, negligent misrepresentation, and tortious interference claims against the former lessee were time-barred.  The Court also held that no evidence supported the lessors’ claim for breach of development claims under the oil and gas lease. Finally, the court affirmed the court of appeals’ judgment, for different reasons, reversing the trial court’s directed verdict with respect to fraud claims based on alleged misrepresentations in Railroad Commission plugging reports filed by the former lessee, and remanded that claim to the trial court for further proceedings.

 

Background

 

In the 1950’s the owners of several thousand acres of land in Refugio, Texas, began entering into leases with Exxon’s predecessor, Humble Oil and Refining Company.  When, in the early 1970’s Exxon attempted to renegotiate for a lower royalty because of declining profitability of operations, the royalty owners declined, and Exxon began plugging and abandoning the wells.  The royalty owners subsequently leased to Emerald.  On trying to reenter the plugged wells, Emerald encountered problems, including wellbores with cut casing and other “junk,” wellbores containing environmental contaminants, and plugs in locations other than those shown on plugging reports Exxon had filed with the Railroad Commission.

 

Emerald, Exxon’s subsequent lessee, sued Exxon for wrongful conduct “in the development and abandonment of oil and gas wells in the Mary Ellen O’Connor Field.”  Specifically, Emerald asserted claims for (1) breach of regulatory duty to plug a well properly; (2) breach of regulatory duty to refrain from committing waste; (3) negligence per se based on alleged violations of various Natural Resources Code sections and Railroad Commission regulations;  (4) tortious interference with economic opportunity; (5) fraud; and (6) negligent misrepresentation.  The royalty owners intervened and asserted claims against Exxon for, inter alia, common law waste, statutory waste, negligence per se,  tortious interference, and failure to develop.  The trial court granted summary judgment for Exxon on Emerald’s first three claims and severed the remaining claims, and Emerald appealed the summary judgment.  The court of appeals reversed and remanded Emerald’s three statutory claims to the trial court, holding that Section 85.321 imposes a duty on current lessees to future lessees and thus provides a basis for a cause of action against Exxon.  Exxon petitioned for review in No. 05-0729.

 

At trial, Exxon obtained a directed verdict on Emerald’s remaining claims and all of the royalty owners’ claims except common law and statutory waste and breach of the lease.  On the royalty owners’ claims, the Jury found in their favor on all issues submitted.  Thus, at the end of the day, Emerald took nothing from Exxon, but the Jury found (1) Exxon committed waste on “property or production” in which the royalty owners “owned an interest”; (2) Exxon failed to act as a reasonably prudent operator in plugging the wells; (3) the royalty owners discovered, or in the exercise of due diligence should have discovered, the waste on January 24, 1995; (4) Exxon failed to comply with the development provisions in the lease; (5) Exxon fraudulently concealed its failure to develop; and (6) in February 1999 the royalty owners knew, or in the exercise of reasonable diligence should have known, that Exxon fraudulently concealed its failure to develop.

 

The Jury awarded the royalty owners:

 

§  $5 million for (a) the cost to drill new wells, (b) the value of the minerals that could not be recovered, and (c) the loss of bonus payments;

 

§  $10 million in punitive damages; and

 

§  $3.6 million for Exxon’s breach of contract, as the amount the royalty owners “would have received for the minerals produced” had Exxon fully developed the leases, less (a) the costs of operation and production and (b) any royalty received from Emerald.

 

All parties appealed, and the Corpus Christi court of appeals affirmed the judgment in favor of the royalty owners, reversed the directed verdict on Emerald’s causes of action for fraud, negligent misrepresentation, and tortious interference and remanded for a new trial.  Exxon petitioned for review in No. 05-1076.

 

The Supreme Court’s Decisions

 

A.        No. 05-0729; Emerald

 

Exxon argued, among other things, that (1) Emerald lacks standing, as subsequent acquirer of the leases, absent an express assignment of specific causes of action; (2) Natural Resources Code § 85.321 does not create any new private causes of action; and (3) violations of the Natural Resources Code do not support a claim of negligence per se.

 

Starting with the plain language of the statute, the Court held that Section 85.321 “clearly creates a private cause of action.”  The Court also noted that express language in the statute, providing a defense to civil actions for lease owners and operators acting as a reasonably prudent operator, adds credence to that conclusion.  The Court also noted that it had previously reached the same conclusion in HECI Exploration Co. v. Neel, 982 S.W.2d 881, 884 (Tex. 1998).

 

The Court declined, however, to recognize Emerald’s standing claim, hesitating to interpret Section 85.321 to give standing to “all subsequent interest holders for prior alleged damage to the land,” absent explicit direction from the Legislature.

 

The court of appeals’ judgment was reversed, and judgment rendered that Emerald take nothing.

 

B.        No. 05-1076; Miesch

1.  Limitations (statutory and common law waste, negligence per se, negligent misrepresentation, and tortious interference)

The parties agreed that a two-year statute of limitations applies to the claims for statutory and common law waste, negligence per se, negligent misrepresentation, and tortious interference, but Emerald and the royalty owners argued that Exxon’s conduct had tolled limitations or delayed accrual of their claims.  As noted above, the Jury had found that the royalty owners discovered, or should have discovered, the waste committed by Exxon on January 24, 1995, but the Court concluded that all claimants had actual knowledge of violations of the lease agreement and their injuries by June 8, 1994, at the latest.  Specifically, the royalty owners advised Exxon in writing in September 1990 that plugging the wells would commit unlawful waste, and Emerald advised the royalty owners in a June 1994 letter that it discovered the cut casing and junk Exxon had placed in one or more of the wells.  Regardless whether fraudulent concealment or the discovery rule tolls any portion of an applicable limitations period, the Court held that actual knowledge of the injury triggers accrual of the cause of action, so limitations against the royalty owners’ breach of lease and waste claims began to run in September 1990 (ending in September 1992), and limitations against Emerald’s and the royalty owners’ negligence and tortious interference claims began to run in June 1994 and ended in June 1996, when the royalty owners had actual knowledge.  Thus, Emerald’s claims (brought in July 1996) and the royalty owners’ claims (brought in September 1996) are all time-barred.

 

2.  Breach of Lease

The royalty owners had claimed that Exxon breached the development clauses of the leases, which required Exxon to “prosecute diligently a continuous drilling and development program until [the tracts are] fully developed for oil and gas.”  Exxon contested the court of appeals’ holding (affirming the Jury’s verdict) that testimony of the plaintiffs’ expert was some evidence that the leases were capable of producing in paying quantities until 1999 and that Exxon did not drill and complete wells in two productive zones.

 

The Court first addressed the scope of Exxon’s development obligations under the leases.  Beginning with the well-established principle that the obligations under an oil and gas lease are strictly contractual, a principle that TxOGA had stressed in its amicus brief, the Court noted that the lease language (providing the tracts are deemed “fully developed” when “at least one (1) well has been drilled and completed in each horizon or stratum capable of producing [oil or gas] in paying quantities”) tracks a common definition of “fully developed”.  Citing judicial and treatise definitions of “drill” and “complete”, the Court concluded that “for a well to be considered ‘drilled and completed’ as contemplated by the development clauses, a hole must be dug in the ground, and if oil or gas is encountered, the casing must be perforated or otherwise be prepared for production,” and a well is “completed” if it is “capable of producing oil or gas.”  The Court rejected the royalty owners’ contention that Exxon must produce and extract all reserves in each zone capable of producing in paying quantities, and concluded that no evidence supported the claim that Exxon had breached its development obligations under the leases.

3.  Fraud

The Court noted that the statute of limitations for fraud is four years and begins to run when the party knew of the misrepresentation, but the briefing on this issue did not identify when Emerald and the royalty owners learned of the allegedly false plugging reports; that Emerald acknowledged that “the first place subsequent operators turn is to those very filings at the Railroad Commission when deciding whether redevelopment can be economically undertaken;” and that it “would seem that the royalty owners learned of the asserted misrepresentations” in Emerald’s June 1994  letter.  But based on either of those dates, the fraud claims would have been timely filed.

 

On the merits of the fraud claims, the court of appeals had held the Jury should have been allowed to consider whether the evidence was sufficient to establish fraud because the evidence did not conclusively disprove the intent-to-induce reliance element of the fraud claim.  The Court did not hold that public filings such as the Commission reports were sufficient to satisfy that element, but that there was some evidence at trial tending to show that Exxon knew, at the time of filing, of an “especial likelihood” the royalty owners and future operators would rely on the reports.  The Court thus affirmed the court of appeals and remanded the fraud claim to the trial court.

 

For more information, please contact Everard A. "Butch" Marseglia, Jr at emarseglia@liskow.com or go to www.liskow.com.