Drill Deeper

Drill Deeper

News and Updates on Oil & Gas Legal Issues

Personal or Predial Servitudes and Why It Matters

Posted in Oil and Gas Operations, Oil and Gas Production, Transactions

© Creative Commons License- image by Ian Munroe

The new Austin Chalk play in central Louisiana is creating a resurgence of exploration activity in several rural areas.  Exploration companies have already begun leasing hundreds of thousands of acres in order to develop and produce minerals.

A key component in developing the Austin Chalk is securing passage to the drill-sites.  Drill-sites are often located far from a public road and accessible only by traversing long stretches of private roads off the leased lands.  In these cases, it is imperative for the exploration company to secure rights of passage over the private roads.  The exploration company has two options: it may secure a right of passage either from the current landowner over which the private road sits or from another person who has the right to assign such right of passage over the private road.

A right of passage generally comes in two forms: a personal or predial servitude.  Simply stated, a personal servitude of passage, referred to legally as a “right of use” is a charge on an estate for the benefit of a person, whereas a predial servitude is a charge on a servient estate for the benefit of a dominant estate.  In this context “estate” simply refers to “land.”  The distinction between the two types of servitudes is important to understand, as the rights associated with each differ.  The most important distinction is that a predial servitude “runs with the land” in that whoever has title to the dominant estate may exercise the predial servitude of passage, even if that person or entity did not have title to the dominant estate when the servitude was created.  By contrast, the ownership of a personal servitude may devolve independently of the ownership of any parcel of land.  This distinction is important as it informs an exploration company who it may secure access from.

Louisiana Civil Code articles 732 through 734 provide the framework for determining whether a servitude is personal or predial.  First, no analysis is needed if the act clearly and expressly declares that the right granted is for the benefit of a person but not an estate, or vice versa.  However, when the act does not expressly declare one way or another, the act must be analyzed as to its intent.

If the right granted was intended to benefit an estate, then the act is presumed to create a predial servitude.  Louisiana Civil Code art. 733.  But if the right granted in the act is merely for the convenience of a person, then it is not considered to be a predial servitude unless it was acquired by a person as owner of an estate for himself, his heirs and assigns.  Louisiana Civil Code art. 734.

The following three recent decisions show how courts use Civil Code articles 732 through 734 to determine whether an act creates a personal or predial servitude.

Franks Inv. Co. v. Union Pac. R. Co., 772 F.3d 1037 (5th Cir. 2014):

It is understood and agreed that the said Texas & Pacific Railway Company shall fence said strip of ground and shall maintain said fence at its own expense and shall provide three crossings across said strip at the points indicated on said Blue Print hereto attached and made part hereof, and the said Texas & Pacific Railway hereby binds itself, its successors and assigns, to furnish proper drainage out-lets across the land hereinabove conveyed.

Applying Louisiana law, the federal Fifth Circuit held that this language created only a personal servitude for the three crossings.  The court reasoned that the original parties failed to utilize “the successors and assigns language” in the granting clause and thus that these rights of crossing were not automatically acquired by Franks when it later acquired its property adjacent to the railroad property and thus could not now be enforced by Franks.  However, the original parties did include such language for the drainage obligation.  Thus, the court further held that the latter clause concerning proper drainage created a predial servitude that could be enforced by Franks against the railroad.

Ritter v. Commonwealth Land Title Ins. Co., 2012-1654 (La. App. 1 Cir. 8/12/13), writ denied, 2013-2462 (La. 1/17/14), 130 So.3d 945:

THIS ACT IS MADE AND ACCEPTED SUBJECT TO THE FOLLOWING:

  1. Timber deed dated June 3, 1993, COB 1554, folio 830.
  2. Seller to reserve fifty foot right of egress and ingress on east property line.
  3. Seller to have one (1) year to remove timber (select cut).
  4. Timber to be cut same as balance of tract.
  5. Seller agrees not to harvest timber in weather conditions that would cause excess damage to property. (Emphasis added)

The Louisiana First Circuit held that the act created only a personal servitude of right of use.  The court held the act did not create a predial servitude because it failed to even mention a dominant estate.  Further, the act did not state that the servitude was being reserved “by the seller as owner of an estate for itself or its assigns.”

Scrantz v. Smith, 2015-214 (La. App. 3 Cir. 10/14/15), 177 So.3d 130:

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that a servitude of passage is hereby granted across the nineteen (19) acres allocated to the wife to provide the husband access to the eighty (80) acres that were allocated to him. This servitude will be located in an area which is least burdensome and inconvenient to the servient estate.

The Louisiana Third Circuit held that this language created only a personal servitude.  Although the purchasers of the 80-acre tract from the ex-husband argued that the language “to provide … access to eighty (80) acres” indicated that the right was being granted to the ex-husband as the owner of an estate, the Third Circuit disagreed holding that the right of passage was being granted to the ex-husband only as a matter of convenience.  In addition, the court noted that the judgment identified only a specific person, “the husband” and the judgment did not describe the dominant estate.

* * *

Determining whether a recorded servitude is personal or predial is often critical to determining what rights, if any, may be assigned to an exploration company.  Although it is often preferable to acquire a right of passage from the current landowner, that may not always be feasible.  If landowners become hostile and demand an exorbitant amount of value for the right of passage, or if landowners flat out refuse to negotiate a right of passage with the exploration company, then the company needs to explore all possibilities of acquiring access to the drill-site.  If a right of passage has been earlier granted to another person, then the company may be able to acquire rights from that other person.  But if ownership has changed since that other person acquired that earlier right of passage, then it becomes crucial to figure out whether that earlier right of passage granted a predial servitude or instead a personal servitude.  The answer to this question will then dictate those additional persons—beyond the current, obstinate landowner—from whom the oil company may want to seek rights to use the road at issue.

 


© Original image used under the Creative Common License.

U.S. Supreme Court Greenlights Expansive Arbitration Clauses in Employment Contracts

Posted in Class Action, Employment Law

On May 21, 2018, the United States Supreme Court issued a landmark decision on employers’ ability to include mandatory and individualized arbitration clauses in contacts with their employees.  The issue came before the high court in cases from the Fifth, Seventh, and Ninth Circuits.  See Epic Sys. Corp. v. Lewis, Docket No. 16-285 (May 21, 2018).  In each case, the employer and employee entered into a contract providing for individualized arbitration proceedings to resolve employment disputes.  Nevertheless, the plaintiff-employees sought to litigate Fair Labor Standards Act (FLSA) claims and related state-law claims through class or collective actions in federal district court.

In an attempt to circumvent the contracts’ arbitration provisions, the plaintiffs relied upon the Federal Arbitration Act’s “saving clause,” which permits courts to disregard an arbitration provision if it violates some other federal law; the employees maintained that an agreement requiring individualized proceedings violates the National Labor Relations Act (NLRA).  For years, courts and the National Labor Relations Board’s general counsel had agreed that such clauses were valid and enforceable.  However, in 2012, the Board reversed course and held that the NLRA trumped the Arbitration Act in instances such as these.  Courts later split on the issue.  The Seventh and Ninth Circuits sided with the employees, while the Fifth Circuit held that such clauses were enforceable.

In a 5-4 decision split along ideological lines (with Justice Kennedy siding with the conservative justices), the Supreme Court ruled in favor of the employers and held that the provisions were enforceable.  Writing for the Court, Justice Gorsuch reasoned that the Arbitration Act’s “saving clause” allows courts to refuse to enforce arbitration clauses only on the grounds of fraud, duress or unconscionability, which did not apply here.  In rejecting the employees’ argument that the NLRA overrides the Arbitration Act in this area, the Court relied on its precedent to try and interpret federal laws in a harmonious fashion so as to give effect to both.  Without a clear intention from Congress to displace the Arbitration Act, the Court relied on the strong presumption that disfavors repeals by implication.

The Court’s opinion invited a strong and lengthy dissent authored by Justice Ginsburg, and joined by Justices Breyer, Sotomayor and Kagan.  Justice Ginsburg argued that

[t]he Court today subordinates employee-protective labor legislation to the Arbitration Act.”  She further opined that the majority’s opinion was “egregiously wrong” primarily because it ignores “the extreme imbalance once prevalent in our Nation’s workplaces, and Congress’ aim in the NLGA [Norris-LaGuardia Act, 20 U.S.C. § 151, et seq.] and the NLRA to place employers and employees on more equal footing.”

Regardless of how one personally feels about this decision, it will undoubtedly have significant effects on employment litigation.  Employers can now safely include in their employment contracts arbitration clauses that mandate individualized resolution of employee claims and all but eliminate the risk of costly class or collective actions from their employees.  Without being able to pursue their claims together, employees (and their attorneys) may be dissuaded from bringing such claims at all.  In the wake of this decision I imagine the general counsels of many companies are revising their employment agreements, and employees are carefully reading theirs.

ALERT- Severance Tax Audit Update

Posted in Legal Updates, Tax

In December of 2017 and again in March of 2018 producers won victories in oil severance tax disputes with the Louisiana Department of Revenue before the Board of Tax Appeals and in the First Circuit Court of Appeal. The Department of Revenue, however, has appealed these rulings and continues to raise the same issues in ongoing severance tax audits with oil producers in the State of Louisiana.

Producers receiving adverse audit findings may contest the findings and assessments without paying or by paying under protest, but you must do it timely.  For details on your rights to challenge these assessments and assistance therewith call Martin Landrieu or Caroline Lafourcade with the law firm Gordon Arata Montgomery Barnett at 504-582-1111 or email mlandrieu@gamb.law or clafourcade@gamb.law.

You can find more in depth information regarding severance tax audits in Louisiana by visiting the following links:

-Louisiana Department of Revenue Attempts to Rewrite Crude Oil Purchase Agreements in an Effort to Collect More Severance Taxes

By Martin Landrieu on May 10, 2017

 -Beware of Louisiana Severance Tax Assessments on Crude Oil

By Martin Landrieu on March 11, 2016

Another Possible Chip Away from the Finality of Confirmed Bankruptcy Plans

Posted in Bankruptcy, Oil and Gas Operations, Oil and Gas Production

A Texas court has recently carved out an exception to the Supreme Court’s ruling in United Student Aid Funds, In. v. Espinosa, 559 U.S. 260 (2010), on the finality of confirmed bankruptcy plans.  In Oklahoma State Treasurer v. Linn Operating, the United States District Court for the Southern District of Texas held Espinosa’s rule that a confirmed plan cannot be collaterally attacked post-confirmation does not apply to unclaimed royalty proceeds that a debtor had been holding for third parties and thus that the Oklahoma State Treasurer could object post-confirmation to a plan provision allocating such unclaimed property to the reorganized debtor.  Concluding that these proceeds were never property of the estate, the court reasoned that, although the Treasurer never objected to the debtor’s reorganization plan, the Treasurer could, nonetheless, object post-confirmation to the treatment of that property because it was never property of the estate in the first place.

To understand the district court’s ruling, it is important first to understand the holding in Espinosa

In Espinosa, a student, Espinosa, took out several federal student loans and later filed for relief under Chapter 13 of the Bankruptcy Code.  Normally, such loans would be non-dischargeable in bankruptcy unless the student could show that not discharging the loans would create “undue hardship,” which can be determined only in an adversary proceeding.  Espinosa sought to discharge the interest payment obligations under his student loans and included provisions to that effect in his proposed plan.  However, Espinosa never filed the requisite adversary proceeding to do so.  United Student, as the manager of Espinosa’s loans, received notice of the proposed plan, but did not object to the proposed discharge of the student loan interest and the plan was subsequently confirmed.  United Student did not file an appeal.

Years later, United Student came to its senses and filed a motion to have the plan declared void based on the procedural deficiency that Espinosa never filed an adversary proceeding, which United Student claimed deprived it of due process.  After the bankruptcy court ruled in favor of Espinosa, the district court ruled in favor of United Student and the Ninth Circuit ruled in favor of Espinosa, the Supreme Court took up the case and affirmed.  The Court noted first that confirmed plans of reorganization constitute final judgments of the bankruptcy court and cannot be overruled except in the case of a void order, which can result from a jurisdictional error or a violation of due process, which is what United Student asserted.  The Court ultimately ruled that because United Student received actual notice of the plan confirmation process and chose to sit quiet without objection and then, following the order confirming the plan, continued to sit quiet without appeal, it received proper notice of the treatment of the student loans, but waived any objection to that treatment by not voicing that objection during the confirmation process.  Although Espinosa should have brought an adversary proceeding, United Student could not claim to have been deprived due process so as to deny it the opportunity to be heard.

Returning to Linn Operating

The Oklahoma State Treasurer filed proofs of claim in Linn’s bankruptcy, seeking possession of certain unclaimed royalties under Oklahoma’s statutes on unclaimed property.  These statutes require an oil and gas operator to pay certain unclaimed royalties from production into an escrow account held by the Treasurer.  The Treasurer did not object during the plan confirmation process, but rather, after the plan was confirmed, filed an adversary proceeding, seeking to recover the royalties from the estate.  Linn countered, among other things, that the Treasurer’s efforts were barred by Espinosa because the Treasurer had notice of Linn’s proposed plan but did not object until after the plan was confirmed.  The bankruptcy court agreed with Linn and dismissed the Treasurer’s claim.

On appeal, the district court reversed.  The court first distinguished the facts from those in Espinosa.  Specifically, the court characterized the royalties as being similar to property subject to a bankruptcy constructive trust, which put them outside of the bankruptcy estate, and thus, outside the jurisdiction of the plan.  Under section 541(d) of the Bankruptcy Code, when the debtor holds only legal, but not equitable title, to property, that property is included in the estate only to the extent of the debtor’s legal title.  The consequence of this is that the debtor/trustee cannot use its avoidance powers to avoid transfers of property that it held in trust for another because it never had equitable title to the property to begin with.

The district court noted that the Treasurer was akin to a debtor acting as trustee over a constructive trust in that the Treasurer was effectively a trustee over the escrowed funds for the unknown beneficiaries.  Thus, stated the district court, the Treasurer was not a “true creditor” as defined by section 101(10)(A) of the Bankruptcy Code even though it filed a proof of claim.  The court further reasoned that the unclaimed royalties were never properly capable of being adjudicated by the bankruptcy court because they were not part of the bankruptcy estate.  The court ruled that Espinosa did not apply because the bankruptcy court’s confirmation of the plan was void for lack of jurisdiction insofar as it related to the unclaimed royalties and thus fit within one of the two exceptions stated in Espinosa to the prohibition against attacking a confirmed plan post-confirmation.  The district court’s reasoning why this defect was a jurisdictional one is opaque and should not be read too broadly.  If there is a colorable claim that the proceeds could be property of the estate (for example, if there is a dispute whether the proceeds belong to a royalty owner or instead the debtor), then this reasoning falls flat.

It is worth noting that the district court ruled the Treasurer to be the trustee of the constructive trust as opposed to Linn, the debtor.  With this ruling, the district court sidestepped a tricky issue.  Under the constructive trust doctrine, the debtor is treated as the trustee of the constructive trust, not the party asserting a claim to the property.  If the court had ruled that the Oklahoma statutes create a constructive trust over which the debtor is the trustee, it would not necessarily follow that the Treasurer could pursue any post-confirmation claims.  Although the debtor may have had legal title over the royalties, it would have held them in trust for whoever the unknown beneficiaries of the royalties were and, thus, would not have had equitable title.  This is more in line with the holdings of cases to which the district court cited, including Matter of Haber Oil Co., Inc., 12 F.3d 426 (5th Cir. 1994), and Begier v. I.R.S., 496 U.S. 53 (1990).  In both cases, the debtor was held to be trustee of a constructive trust, created under applicable nonbankruptcy law.  But the Treasurer is in the same position for any proceeds it holds: it has only legal, and not beneficial, title to such proceeds; the Treasurer is not free to spend those proceeds as part of Oklahoma’s government spending.

Thus, while the bankruptcy court perhaps lacked the authority to convey equitable title to these proceeds to Linn, it seems that the bankruptcy court nonetheless would have jurisdiction to address the debtor’s legal title to these proceeds.  Thus, it seems that the bankruptcy court could have allowed the debtor to continue holding these proceeds post-confirmation, at least if the Treasurer did not timely object.

This decision acts as a reminder that Espinosa is not the end of the story.  It is still generally true that once a plan is confirmed and the appeal period has run, that plan cannot be attacked thereafter.  However, creditors and debtors alike should be aware that issues remain over the extent to which state law controls what property is even subject to the plan to begin with.

BOEM Proposes Beaufort Sea Lease Sale for 2019

Posted in BOEM, Outer Continental Shelf

In late March, the United States Bureau of Ocean Energy Management (BOEM) issued a Call for Information and Nominations for a proposed sale in the Beaufort Sea Planning area in late 2019.  The Beaufort Sea is a marginal sea of the Arctic Ocean north of the Northwest Territories, the Yukon, and Alaska and west of Canada’s Artic islands.  The stated purpose of the Call is to “solicit industry nominations for areas of leasing interest and to gather comments and information on the area included in the Call for consideration in planning for the proposed OCS [Outer Continental Shelf] oil and gas lease sale.”

Pursuant to federal regulation, BOEM has requested comments from the industry and public regarding:

Industry interest in the area proposed for leasing, including nominations or indications of interest in specific blocks within the area;

(a) Geological conditions, including bottom hazards;

(b) Archaeological sites on the seabed or near shore;

(c) Potential multiple uses of the proposed leasing area, including subsistence and navigation;

(d) Areas that should receive special concern and analysis; and

(e) Other socioeconomic, biological, and environmental information.

One BOEM official has recently stated that he believes the Beaufort Sea possesses great oil and gas potential, but that because of its unique and environmentally sensitive areas important to the subsistence needs of the region’s Alaska Native communities, this Call process is integral to identify which areas can be safely drilled and which should be protected for wildlife and traditional uses.

Once the Call process is complete and BOEM has had an opportunity to review and analyze the comments, BOEM will proceed to area identification, where it will develop a recommendation of the area proposed for leasing and an environmental analysis.  If Interior Secretary Zinke approves the proposal, the agency will then publish the proposed area for leasing in the Federal Register.  BOEM appears to recognize that its timeframe for potentially leasing blocks in the Beaufort Sea is ambitious; the Call itself states that for a lease sale to happen in 2019, “and given the long lead time needed to prepare for a proposed sale, the planning process must begin now.”

In the past, the federal government has been reticent to allow drilling in the Arctic.  The Trump Administration has clearly taken a more robust approach to drilling for oil and gas in this area.  While BOEM is satisfying its regulatory requirements before making an official decision to lease this area—and purportedly a final decision has yet to be made—it seems all but certain that it fully intends to start leasing blocks.  But we must wait to see where exactly the industry will have new opportunities and what areas will remain preserved for environmental and Native concerns.

At last month’s Gulf of Mexico sale, the BOEM offered 77 million acres up for lease; however, it drew little interest in undeveloped areas lacking established infrastructure.  So even if BOEM ends up having a lease sale for the Beaufort Sea, it remains to be seen whether industry will jump at any new opportunity in the Arctic.

Reverberations from Trump’s Steel Tariffs Likely to Reach the Oil and Gas Industry

Posted in Energy Costs, Oil and Gas Operations, Tariffs

President Trump’s proposed 25% steel tariffs will obviously affect industries beyond the domestic steel producers. One of those industries is the oil and gas industry. From first producers to pipeline companies to liquefied natural gas (LNG) transporters, steel is an essential material for the necessary infrastructure.

At the recent CERAWeek energy conference in Houston, Senator Lisa Murkowski (R, Alaska) voiced concern over the effects the steel tariffs are likely to have on a planned natural gas export terminal in Alaska, which is part of a $43 billion joint development deal with China-based companies involving an 800-mile pipeline. According to Murkowski, the tariffs could add $500 million to the cost of the terminal. The project is aimed at selling more LNG to Asia, including South Korea, a principal U.S. natural gas importer. On the heels of the United States becoming a net natural gas exporter in 2017, Murkowski said,

Higher prices for steel–which accounts for a significant portion of project costs–could easily set us back.”

Murkowski is not alone in her disagreement with the President. Senator John Cornyn (R, Texas) has also criticized the protectionist attitude driving the proposed tariffs for its potential negative affect on industries in his state of Texas.

The oil and gas industry is especially concerned because the type of steel used in pipelines and other energy infrastructure comes at a higher cost because of its unique grade and quality, which led many domestic producers to abandon that market. Steel already accounts for a large portion of the production costs, and the tariff would add to that already high cost.

Industry leaders plan to ask the Trump administration for an industry-wide exemption from the tariffs, but it is unclear how the administration will react. GAMB will continue to monitor this issue as it develops and encourages anyone possibly affected to contact us with questions.

Full Fifth Circuit Clarifies What Constitutes a Maritime Contract

Posted in Maritime, Oil and Gas Operations

This month, the Fifth Circuit en banc unanimously set aside prior precedent and adopted a “simpler, more straightforward test” for determining whether a contract relating to oil or gas activities on navigable waters constitutes a maritime activity.  In re Larry Doiron, Inc., No. 16-30217, 2018 WL 316862 (5th Cir. Jan. 8, 2018) (en banc).  This classification is important because it often determines whether an indemnity provision is unenforceable under state law or instead is enforceable under general maritime law.  This decision will have profound effects on oil and gas operations and represents a significant departure from the Fifth Circuit’s prior approaches.

In 2005, Apache Corporation entered into a master services contact with Specialty Rental Tools & Supply, L.L.P.  In 2011, Apache issued an oral work order that directed Specialty to perform “flow-back” services to remove obstructions affecting the flow of a gas well in navigable waters in Louisiana.  The only access to the well was via a stationary production platform.  This work order did not require a vessel, and neither party anticipated that a vessel would be necessary to perform the job.

After an unsuccessful attempt to fulfill the work order, the Specialty crew determined that it needed a different piece of equipment, which would require a crane to be moved.  However, the production platform was too small to accommodate a crane, so Specialty suggested that Apache engage a barge equipped with a crane to move the equipment.  Apache agreed to this suggestion and hired Larry Doiron, Inc. to provide a crane barge.  During operations, one of the Doiron crane operators accidently struck and injured a Specialty crewmember.

After the injured crewmember sued Doiron, Doiron sought a declaration that it was entitled to indemnity from Specialty under  Specialty’s master services contract, while Specialty conversely sought a declaration that Doiron was not entitled to immunity.  The resolution of this issue hinged on whether the master service contract was a maritime contract.  If so, general maritime law would enforce its indemnity provisions.  However, if it was not a maritime contract, Louisiana law would apply, and the Louisiana Oilfield Indemnity Act, La. Rev. Stat. § 9:2780,would preclude enforcement of the indemnity provisions.  The district court held that maritime law applied, thus enforcing the indemnity provisions in favor of Doiron against Specialty.

On appeal, a three-judge panel of the Fifth Circuit affirmed on the basis of Circuit precedent in Davis & Sons, Inc. v. Gulf Oil Corp., 919 F.2d 313 (5th Cir. 1990), directing courts to consider six factors when determining whether the a contract is or is not a maritime contract:

(1) What does the specific work order in effect at the time of injury provide? (2) What work did the crew assigned under the work order actually do? (3) Was the crew assigned to work aboard a vessel in navigable waters? (4) To what extent did the work being done relate to the mission of that vessel? (5) What was the principal work of the injured worker? and (6) What work was the injured worker actually doing at the time of injury?

After exhaustively analyzing the Davis & Sons factors, the panel held that the “district court did not err by determining maritime law applies,” and therefore affirmed.  However, Judge Davis, joined by Judge Southwick (the author of the panel opinion), specially concurred.  Although Judge Davis joined the majority opinion because it faithfully followed precedent in Davis & Sons and its progeny, he recognized the criticism this case had received, especially in light of recent Supreme Court precedent.  Finding that the test enumerated in Davis & Sons was “too inflexible to allow the parties or their attorneys to predict whether a court will decide if a contract is maritime or non-maritime or for judges to decide the cases consistently,” he urged the full Fifth Circuit to take the case en banc and correct this issue.  See In re Larry Doiron, Inc., 869 F.3d 338 (5th Cir. 2017) (panel opinion).  Under most circumstances, three-judge panels are bound to follow Circuit precedent.  However, when a case is taken en banc, the full court may overrule or modify Circuit precedent by a majority vote.  The Fifth Circuit heeded Judge Davis’s request and granted rehearing en banc.

On rehearing, Judge Davis wrote unanimously for the entire court (newly appointed Judges Willett and Ho did not participate in this decision).  He highlighted that the Supreme Court’s later decision in Norfolk Southern Railway Co. v. Kirby, 543 U.S. 14 (2004) allowed them to “avoid[] most of the unnecessary analysis required by Davis & Sons.”  Under Kirby, Judge Davis emphasized, courts must look not just to whether a ship or other vessel was involved in the dispute, nor simply to the place of the contract’s formation or performance (those are tort factors, not contract factors), but instead must focus on the nature and character of the contract; “the true criterion” is whether the contract has reference to maritime services or maritime transactions.  Judge Davis further recognized that the emphasis in Kirby that “the fundamental interest giving rise to maritime jurisdiction is the protection of maritime commerce.”

Based on Kirby, the Fifth Circuit adopted a two-prong test to determine whether a contract is maritime:

First, is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters?  The answer to this inquiry will avoid the unnecessary question from Davis & Sons as to whether the particular service is inherently maritime.  Second, if the answer to the above question is “yes,” does the contract provide or do the parties expect that a vessel will play a substantial role in the completion of the contract?  If so, the contract is maritime in nature.

Nevertheless, the Fifth Circuit did not fully dispose of Davis & Sons, and explained that its factors may be relevant when the scope of the contract is unclear.  Applying this new test to the specific facts of the case, the Court reasoned that the vessel to lift equipment was an insubstantial part of the job and therefore the contract was non-maritime, subjecting it to Louisiana law.  As such, Louisiana’s anti-indemnity statute barred enforcement of the master service contract’s immunity provisions.

Kudos again to Judge Davis.  Yet again, he brings refreshing clarity to an issue mired in confusion and uncertainty for decades.  As federal appeals courts infrequently hear cases en banc, this case is a rare and paradigmatic example of what the procedure was intended to accomplish and why it is so important.  Parties engaged in oil and gas operations within the Fifth Circuit can now have far better certainty how their contracts will be classified, which in turn permits them to better assess their risks.  This information behooves all parties involved.

Can Parties Form an Enforceable Contract to Sell Assets Based on Exchanged Emails When the Bid Procedure Required a Purchase and Sale Agreement? Texas Court of Appeals says Maybe

Posted in Transactions

A recent Texas case highlights the importance of making clear which agreements are binding and which are not.  In Le Norman Operating LLC v. Chalker Energy Partners III, LLC, No. 01-15-01099-CV, 2017 WL 4366265 (Tex. App. Oct. 3, 2017), a group of sellers of oil and gas interests closed a transaction with Jones Energy to sell those assets, but not before being sued by a jilted third party, Le Norman Operating LLC (“LNO”).  LNO alleged that the sellers had entered into a prior binding agreement with LNO for the sale of the same assets.  As the Texas Court of Appeals reminds us, it is important for a seller in a completive sale process to comply with its own bidding procedures and to ensure that the actions of its representatives do not unintentionally create a binding agreement.

In Le Norman Operating, a group of sellers sought to divest their oil and gas interests located in the Texas panhandle and engaged a financial services company, Raymond James, to conduct a competitive bidding process.  Raymond James provided potential purchasers with access to a virtual data room and typical bid documents: an information memorandum, a confidentiality agreement, a data room presentation, two confidential bid instruction letters and a form purchase and sale agreement.

After receiving the first round of bids, Raymond James asked the two highest bidders, LNO and Jones Energy, to increase their bids.  The sellers’ representative, Chalker Energy, selected LNO’s increased bid for 100% of the assets to present to the other working interest owners.  However, the sellers were willing to sell LNO only 82% of the assets, subject to a reversionary interest.  After several counter-offers, LNO informed Chalker Energy via email that it would no longer pursue the transaction “as altered by the Sellers.”

Five days later, the sellers offered to sell a smaller percentage of the assets to LNO.  On November 19, 2012, LNO responded by sending Raymond James an email with the subject line “RE: Counter Proposal” that listed the following specific terms:

  1. $230 M for 67% of the 8/8ths [Raymond James] supplied database property set
  2. Eff date same at 9 1 12
  3. Execution of the PSA on or before 11 20 12, closing on or before 12 31 12
  4. Non-compete for ALL owners for one year with two mile halo around any unit being sold
  5. PSA similar to what we returned with the above caveats
  6. Our interest is not subject to the development agreement
  7. All parties staying in will execute JOA, it will be attached to the PSA

Further, the email stated:

We will not be modifying or accepting any changes to the base deal described above and don’t want to be jerked around anymore.  We will give you [until] 5:00 pm CST tomorrow [November 20] to accept.  Best we can do and you hopefully understand I have recommended to my Board to pass if the timeline is not met or a counter proposal is sent.  Good luck.

The email did not reference the formal bid procedures.  LNO’s proposed procedure specifically conflicted with the bid procedures which would have allowed each seller 24 hours from receipt of a recommendation by Chalker Energy to make a written election to participate.  The sellers did not receive Chalker’s recommendation until November 20—the same day their acceptance was due to LNO.

Nevertheless, the sellers decided to participate.  Raymond James emailed LNO before LNO’s deadline and stated: “We have the group on board to deliver 67% subject to a mutually agreeable PSA.  We are calling to discuss next steps and timing.  Chalker et al. will be turning a PSA tonight to respond to your last draft.  Please give me a call to discuss schedule and timing.”

LNO and the sellers began finalizing the PSA and key exhibits, including escrow agreements, a non-compete agreement and a joint operating agreement.  During the PSA negotiations, several emails were exchanged between various sellers and LNO referring to LNO “winning the bid” and “what is being sold to [LNO].”

On November 21, 2012 (the day before Thanksgiving), Chalker Energy emailed LNO an updated draft of the PSA.  Yet, after sending that draft, the sellers accepted a competing offer from Jones Energy.  The sellers and Jones Energy finalized and executed their PSA on November 28.  That same day, LNO delivered its response to Chalker Energy’s prior draft PSA.  However, after LNO learned of the Jones Energy agreement, LNO sent the first of several written demands that the sellers honor the “contract” they had entered into with LNO on November 19-20.

The Jones Energy deal closed, but Jones Energy refused to release $12.5 million in escrowed funds.  Jones Energy alleged that the sellers’ failure to disclose LNO’s demands was a breach of the Jones Energy PSA.  LNO later filed suit against the sellers for, among other things, breach of their November 19–20 agreement.  The district court granted partial summary judgment for the sellers, dismissing LNO’s breach of contract claim in part because there was no meeting of the minds and no evidence that the parties intended to be bound by any agreement.  LNO appealed.

The Texas Court of Appeals, First District, examined whether a valid contract existed between LNO and the sellers.  It outlined the applicable test as follows:

Parties form a binding contract when the following elements are present: (1) an offer, (2) an acceptance in strict compliance with the terms of the offer, (3) a meeting of the minds, (4) each party’s consent to the terms, and (5) execution and delivery of the contract with the intent that it be mutual and binding.  Whether the parties formed a contract is generally a fact question, although it may be determined as a matter of law.

Further, the court specified that “[a] binding agreement may exist when parties agree on some terms sufficient to create a contract, leaving other provisions for later negotiation” and “when an agreement leaves essential (or material) matters open for future negotiation and those negotiations are unsuccessful, however, the agreement is not binding upon the parties and merely constitutes an agreement to agree.”

The sellers argued that the terms of the bid documents and the confidentiality agreement governed any potential contract between LNO and the sellers.  The sellers maintained that the terms of these documents precluded the existence of a valid, binding contract in the absence of an executed PSA.

The court relied on guidance from the Texas Supreme Court “that the determination of whether a ‘contemplated formal document’ was a condition precedent to the formation of a contract or ‘merely a memorial of an already enforceable contract’ depended on the intent of the parties, which is usually a question for the trier of fact.”  The court noted that the initial bid procedure failed to result in a sale of the assets.  LNO’s November 14 email stated that it could no longer pursue the transaction.  The court stated that LNO sent its November 19 email after the initial bid process had concluded, and the email did not conform to the requirements of the bid process.  Moreover, the sellers continued to negotiate with LNO after it had deviated from the established bidding procedures.  The court determined that LNO had “raised a genuine issue of material fact regarding whether the alleged contract set out in the November 19–20, 2012 emails was subject to the bid process rules.”

The court also concluded that “the plain language of the Confidentiality Agreement does not preclude, as a matter of law, the existence of a valid, binding contract in the absence of an executed PSA.”  The Confidentiality Agreement provided that “until a definitive agreement has been executed and delivered, no contract or agreement providing for a transaction between the Parties shall be deemed to exist,” and that a letter of intent or preliminary agreement was not a definitive agreement.  Yet the Confidentiality Agreement did not further define what constituted a “definitive agreement.”  This omission led the court to conclude that a “fact issue exists as to whether the November 19–20 email chain and subsequent written elections were sufficient to constitute a ‘definitive agreement’ for the sale of the Assets.”

The sellers also argued that there was no meeting of the minds between them and LNO or any intent to be bound.  Nonetheless, the court found that a fact question existed “as to whether the parties intended to be bound by the terms set out in the November 19–20 emails and as to whether the November 19–20 emails and written elections were sufficiently definite, certain, and clear as to the essential terms of the sale as to constitute an enforceable contract.”  In support, the court referenced the specific terms and language in LNO’s November 19 email and the fact that the sellers ultimately elected to participate in the transaction.  Even though the sellers and LNO had not negotiated or agreed on every provision of the sale, the court reasoned that there was “at least some evidence that the parties agreed and had a meeting of the minds on the essential terms of the sale sufficient to create a contract . . . .”

So what’s the lesson?  As Le Norman Operating illustrates, parties to a competitive bidding process and their agents should strictly adhere to any prescribed bidding procedures.  Procedural deviations and meanderings by either party may establish a course of action that unintentionally couples the parties to what may have been intended to be non-binding negotiations.

Louisiana Secretary of State Adopts New Rule For Domestic Entities in Certain Parishes and Foreign Entities

Posted in Louisiana Corporate Law, News

Effective January 1, 2018, the Louisiana Secretary of State will require domestic entities domiciled in Ascension, Bossier, Caddo, Calcasieu, East Baton Rouge, Jefferson, Lafayette, Livingston, Orleans, Ouachita, Rapides, St. Tammany, Tangipahoa, and Terrebonne to file all available business documents online through GeauxBiz.com.  GeauxBiz.com is the Secretary of State’s official online portal for filing formation documents, amendments, annual reports, and other organizational filings.  Although online filing with the Secretary of State via GeauxBiz.com has been an available alternative to filing in person or via U.S. mail for some time now, online filing will be the exclusive means of transmitting such documents to the Secretary of State for Louisiana businesses domiciled in the above-listed parishes beginning January 1, 2018.  According to the Secretary of State, this new rule will also apply to all foreign entities (i.e. entities domiciled outside of Louisiana) that are registered to do business in Louisiana, regardless of their principal places of business within Louisiana.  Online filing will remain optional for Louisiana entities domiciled in parishes other than the ones listed above.

In some instances, online filing may provide businesses with a more convenient option for filing documents with the Secretary of State.  But there is a tradeoff.  In an attempt to “streamline” the registration process for businesses in 2015, GeauxBiz integrated online filing capabilities for the Louisiana Department of Revenue and the Louisiana Workforce Commission with that of the Secretary of State.  The intention for this change was to provide business owners a “one-stop shop” for online filing; however, in practice, the change instead has complicated and protracted this process.  For instance, to form a business using GeauxBiz, the business owner must register for a federal tax identification number from the IRS and apply for an unemployment insurance tax account number before submitting the required formation documents to the Secretary of State.  Such ancillary filings may be wholly unnecessary in some instances, such as when forming a single-member LLC that will not employ anyone in its operation.  Additionally, in some instances, online filing requires the filer to provide personally identifiable information (e.g., Social Security numbers) for shareholders, members, officers, and/or managers which may prohibit same-day entity formation.  In light of the upcoming change, affected business owners who have not previously filed documents via GeauxBiz should familiarize themselves with the online portal and, where possible, anticipate complications.

Gordon Arata Montgomery Barnett has experience using GeauxBiz and would be happy to assist clients with their GeauxBiz filings.

Louisiana First Circuit Tosses Out Commissioner of Conservation Order

Posted in Environmental

The Louisiana Court of Appeal for the First Circuit in Louisiana Environmental Action Network v. Welsh, 2016-0906 (La. App. 1 Cir. 6/14/17); 224 So. 3d 383, recently ruled that an order issued by the Commissioner of Conservation was overly broad, arbitrary and capricious.  Reversing the lower court’s ruling upholding the Commissioner’s order allowing construction of a new transfer station for oil and gas exploration and production waste, the First Circuit held that, despite the Commissioner’s broad authority over the State’s oil and gas resources, the order violated lawful procedure because it was beyond the scope of what was requested in the underlying application.

FAS Environmental Services, LLC (“FAS”) submitted an application to the Louisiana Department of Natural Resources seeking a permit to construct and maintain a new transfer station located in St. Mary Parish.  The proposed transfer station consisted of a truck unloading area with above ground storage tanks to receive and temporarily store energy and production waste.  The waste would later be transferred by pipeline to FAS’s existing disposal facility and then eventually injected into FAS’s disposal wells.  In the permit application, and during the later legal proceedings, FAS represented that the new transfer station would replace FAS’s existing station, which required the use of barges to transfer the waste from the station to the disposal facility.  The new station’s proposed location was about one and a half miles north of the existing transfer station and, due to the use of a pipeline, would eliminate the necessity of barging the waste.

After conducting a public hearing and receiving public comment, the Commissioner issued Conservation Order No. ENV 2015-03 CFT approving FAS’s application for the new transfer station.  Even though closure of FAS’s existing transfer station and relocation of its operations to the new transfer station were expressed in FAS’s application, the order did not condition the approval to construct the new station on the closure of the existing station.  Thereafter, several environmental groups filed suit in the 19th JDC for East Baton Rouge Parish seeking judicial review of the order.  The district court upheld the order, and the plaintiffs appealed that holding to the First Circuit on four bases:

  1. that the Commissioner violated statutory law by failing to consider conflicts with St. Martin Parish’s master plan before approving the order, which would move industrial activity through a residential area and affect nearby recreational and tourism resources;
  2. that the Commissioner was arbitrary and capricious in approving the order when the record does not establish, as required by the Commissioner’s rules, that the containment wall surrounding the storage tanks will withstand the velocity of a 100–year flood;
  3. that the Commissioner committed legal error in concluding that local zoning ordinances were preempted and therefore irrelevant to his decision; and
  4. that the Commissioner was arbitrary and capricious in approving the order, which authorized FAS to operate a second transfer station without requiring FAS to close the first transfer station.

Focusing on the plaintiffs’ fourth argument, the First Circuit noted that FAS’s application was for the “relocation” of its existing station, not for the operation of a new station in tandem with the existing station. The court also noted that the environmental data and information submitted in conjunction with the application was limited to the operation of one station and that public comment was invited as to the operation of one station. Although the Commissioner has exclusive jurisdiction to regulate the disposal of waste products (including the disposal facility and transfer stations at issue), the court nevertheless held that the Commissioner’s order was arbitrary and capricious because no rational basis existed in the administrative record to permit FAS to operate both the new transfer station and the currently operating station.

Interestingly, the court acknowledged that the absence of conditional language regarding the closure of the existing transfer station may have been unintentional.  Moreover, the court’s opinion never mentions whether FAS ever signaled any intention of relying on the order to continue operating the existing station once the new station was operational.  Although the Court may have considered other, unreported factors, it appears that the court believed that, by showing a mere possibility that the Commissioner’s order hypothetically could have allowed FAS to operate both transfer stations, the plaintiffs had satisfied their burden of showing that the Commissioner’s order was arbitrary and capricious.

The court’s opinion was conspicuously silent about the plaintiffs’ three other arguments.  It is unclear whether the plaintiffs will be able to push any of the three other arguments on remand.  On the one hand, the plaintiffs might argue that, because the First Circuit did not address these issues, the plaintiffs are free to push them again on remand.  On the other hand, FAS might argue that the First Circuit necessarily, even if only implicitly, rejected these three arguments, or otherwise would have reversed, rather than just vacated, the Commissioner’s order.  These issues will remain for resolution on another day.