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News and Updates on Oil & Gas Legal Issues

The Fifth Circuit Allows Debtor Mineral Lessee to Avoid Breached Settlement Agreement with Mineral Lessor

Posted in Bankruptcy, Mineral Leases

The Fifth Circuit’s recent ruling in Fallon Family, L.P. v. Goodrich Petroleum Corp. reinforces that parties to mineral leases should be very careful when drafting documents to be recorded in public records.  The case stems from a 1954 mineral lease between the Fallon Family L.P.’s predecessor in interest, as lessor, and Goodrich Petroleum, as lessee.  The lease covered 487 acres in Caddo and DeSoto Parishes in Louisiana.  In 2012 the Fallon Family sought to terminate the lease on the grounds that Goodrich had ceased continuous operations on three units within the leased area.  In October of 2014, the Fallon Family filed two notices of lis pendens in both parishes to put third parties on notice that there was a pending suit that could affect the leased premises.  Four days later, the parties agreed to settle the dispute and memorialized the settlement in a Settlement Agreement.

Under the Settlement Agreement, Goodrich made a one-time payment of $650,000 and gave the Fallon Family a $1,000,000 promissory note to be paid in $100,000 bi-annual installments.  Having resolved the dispute over the lease, the parties filed in both parishes a Lease Ratification which stated:

NOW, THEREFORE, for the promises and covenants exchanged below, and other good and valuable consideration exchanged by the Parties on or near this date, the receipt and sufficiency of which is hereby acknowledged, the Parties agree to [the listed promises and covenants].

The Lease Ratification went on to provide that the lease was affirmed, ratified, and in full force and effect.  There was no mention of the Settlement Agreement or the promissory note.

Goodrich made one payment on the promissory note, but failed to make the second payment and filed for protection under Chapter 11 of the Bankruptcy Code.

In the bankruptcy proceedings, the Fallon Family sought, among other things, to dissolve the Settlement Agreement because of Goodrich’s breach (i.e., its failure to make payments on the promissory note).  Dissolution of the Settlement Agreement would allow the Fallon Family to pursue a claim for termination of the lease and, presumably, to lease it to another interested party.  Goodrich, in opposition, took the position that section 544 of the Bankruptcy Code, nicknamed the “strong arm” provision of the Code, allowed it to step into the shoes of a bona fide purchaser of the lease and “avoid” the settlement agreement, in a sense “strong-arming” the Fallon Family into continuing the lease despite the breach.  The bankruptcy court, the district court, and the Fifth Circuit all agreed with Goodrich.

For purposes of § 544, the debtor-in-possession (or trustee) is treated as a different entity than the prepetition debtor.  It grants a debtor-in-possession (or trustee) all of the rights and powers of a bona fide purchaser of real property who perfected such purchase at the time of the commencement of the case, whether or not such a purchaser exists.  As the court put it, “the Bankruptcy Code creates a legal fiction affording a debtor-in-possession the abilities it would have as a bona fide purchaser of the debtor’s interests in immovable property at the time the bankruptcy is filed.”

Under Louisiana’s law of registry, a third party (which the court found a bona fide purchaser of real property to be) may rely on the absence of documents in the public record to determine interests in immovables.  The court ruled that because the lease ratification stated that the lease was in full force and effect and that consideration for the lease ratification had been fully paid, Goodrich, wearing the hat of a third party, may rely on that statement (or, more precisely, on the absence of any indication in the public record that the lease’s continuing viability was dependent on payment under the promissory note) and thus prevent the Fallon Family from dissolving the settlement agreement regardless of the fact that Goodrich, as the prepetition debtor, had in fact breached the agreement.  The court concluded that “because the Lease Ratification shows the purchase price has been paid, the Fallon Family cannot dissolve the Settlement Agreement.”  The Fallon Family was, thus, left with a $900,000 unsecured claim against Goodrich without the ability to terminate the lease.  Showing little sympathy, the court concluded with these words: “Unfortunately, creditors often do not receive the full amount of their claims; however, this is a feature, not a flaw, of the design of the bankruptcy system.”

This ruling serves as an important and costly lesson that any documents recorded in the public record should be carefully worded to accurately represent the true nature of all interests in immovable property.  If the rights and interests in immovable property are made subject to a conditional or ongoing obligation (like a promissory note), the recorded document should explicitly reference that obligation.

Louisiana Supreme Court Settles Two Important Questions Under the Mineral Code

Posted in Oil and Gas Operations, Oil and Gas Production

On June 27, 2018, the Louisiana Supreme Court resolved two important questions of Louisiana law over the scope of liability for breaches of mineral leases and over the maximum liability for unpaid royalties.  In Gloria’s Ranch, L.L.C. v. Tauren Exploration, Inc., No. 2017-C-1518 (La. 6/27/18), the Louisiana Supreme Court held (1) that a mineral lessee’s mortgagee is not liable to a mineral lessor for damages under the Mineral Code for breach of the mineral lease and (2) that the maximum allowable damages under Mineral Code article 140 for underpayment of royalties is double (not treble) the amount of damages owed.

The facts in the case are complicated, but here are some critical ones.  In 2004, Gloria’s Ranch granted to Tauren Exploration a mineral lease covering lands in five sections in Caddo Parish; the lease had a three-year primary term.  During the primary term, Tauren assigned an undivided 49% interest in the lease to Cubic Energy, which then granted to Wells Fargo Energy Capital, Inc. a mortgage in its leasehold rights and security interest in its share of related production.  Wells at or above the Cotton Valley Formation (the “Shallow Depths”) were successfully drilled in three sections.  After the primary term, the entirety of each of the two remaining sections was unitized in the deeper Haynesville Shale formation, and a successful well located within each such unit but off the Gloria’s Ranch lease was completed for each such deep unit.  Thereafter, Tauren sold to EXCO USA Asset, Inc. 51% of its leasehold rights with respect to the depths below the Shallow Depths (the “Deep Rights”).  Thereafter, Gloria’s Ranch sent a letter to Tauren, Cubic, EXCO and Wells Fargo for information whether the lease was still producing in paying quantities.  Dissatisfied with the response, Gloria’s Ranch then sent a letter demanding a recordable release of the lease; when no such release was forthcoming, it filed suit alleging that the lease had expired for not producing in paying and seeking damages from this failure to release; it also sought damages for unpaid royalties from one of the sections.  Gloria’s Ranch settled with EXCO and, after a bench trial, obtained a favorable judgment.  Significantly, the trial court held Wells Fargo solidarily liable with Cubic and, for unpaid royalties of around $240,000, awarded three times that amount pursuant to Mineral Code article 140.  The second circuit affirmed.

The Louisiana Supreme Court reversed on both issues.  It squarely rejected the position of the lower courts and Gloria’s Ranch that, in light of the “bundle of rights” and control Wells Fargo held under its mortgage, it should be considered a “former owner” under Mineral Code article 207 and a “lessee” under Mineral Code article 140 and thus solidarily liable with its mortgagor.  The Court explained that Wells Fargo’s rights were merely “incidental to mortgage and credit agreement[s]” and did not “r[i]se to the level of ownership of a mineral lease.”  The Court further reasoned that nowhere in the Mineral Code does ownership of a lessee’s interest transfer via a theory of control of rights, but rather only though assignment or sublease.  This ruling in favor of Wells Fargo is sensible; a ruling otherwise would have jeopardized oil and gas financing throughout Louisiana—and perhaps more broadly nationwide.

The Court also addressed the long-simmering question over the maximum allowable damages under Article 140 of the Mineral Code.  The article provides:

If the lessee fails to pay royalties due or fails to inform the lessor of a reasonable cause for failure to pay in response to the required notice, the court may award as damages double the amount of royalties due, interest on that sum from the date due, and a reasonable attorney’s fee regardless of the cause for the original failure to pay royalties. The court may also dissolve the lease in its discretion.

Since its enactment over forty years ago, the industry and courts alike have grappled with the question whether Article 140 permits a total maximum recovery of just twice the royalties due or instead permits up to twice the royalties due plus the actual royalties due (for a total of three times the royalties due).

Finding the text of article 140 clear, the Court easily held that courts may only award “a maximum of two times the amount of unpaid royalties, not three times.”  The Court explained that to permit treble recovery would assume that the unpaid royalties are something separate than the “damages” permitted under Article 140, which would ignore the common and “plain meaning of the word ‘damages.’”

In a dissenting opinion, Justice Genovese suggested that this holding ignores Mineral Code article 139, which provides that, if a lessee pays the royalties due in response to a notice from the lessor, the court “may award as damages double the amount of royalties due … provided the original failure to pay royalties was either fraudulent or willful and without reasonable grounds.”  Per Justice Genovese, it was illogical that the legislature would allow a lessor to collect no more than twice the royalties due when no royalties were paid, but could effectively allow a lessor to collect three times the royalties due when the actual royalties due were paid before suit was filed.  Although the majority did not address his point, Justice Genovese failed to consider that the opportunity for a triple recovery under article 139 is permitted only in cases of fraud or willful misconduct by the lessee and that article 140 does not address these circumstances.  Admittedly, the entire statutory scheme has some warts, but the majority’s conclusion seems the more textually supported: courts should not, in the name of policy, add statutory language that the legislature, for whatever reason, did not include.  And of course, the legislature is always free to amend the statute in the future.

The Court also raised, but ultimately left for another day, the issue whether the holder of leasehold rights for one portion of a lease (say, shallow rights) could be liable for breaches relating to other portions of the lease (say, deep rights).  Tauren (which ultimately held only a 51% interest in the Shallow Depths) argued that the bulk of the damages relating to failure to provide a release of the Deep Rights and that the obligations relating these Deep Rights were divisible from the obligations relating to the Shallow Depths.  But because Tauren was the original lessee as to all depths and also because the lease had stopped producing in paying quantities before Tauren sold its remaining Deep Rights to EXCO, the Court rejected Tauren’s efforts to limit its liability and thus left for another day this important issue whether obligations to provide a release instrument can in some circumstances be considered divisible or not.

Regardless of how one may feel about the Court’s resolution of these two central issues, it is always nice to have clarity within the law.  The Louisiana Supreme Court’s decision here resolves two important questions that have created consternation within the industry and complicated parties’ analyses of their risks.  Going forward, all players should have a better sense of the lay of the land.  This third issue will have to await another day.

United States Coast Guard Issues Marine Safety Alert and Strongly Recommends Inspection of Personal Flotation Devices

Posted in Louisiana Waterways, Maritime, Offshore, Oil and Gas Operations, Outer Continental Shelf, Uncategorized

On June 18, 2018, the United States Coast Guard (USCG) issued a Marine Safety Alert regarding their discovery of over 100 unwearable Type 1 Personal Floatation Devices (PFDs) during multiple inspections of different vessels. As pictured below, the PFD straps were fused to the side of the PFD.  Due to the fused strap, a user would be unable to separate the halves of the PFD to wear it. The USCG safety alert deliberately omitted the PFD manufacturer’s name because the scope of the potential problem is not fully known.

However, based on the number of problematic PFDs discovered, the USCG strongly recommends that vessel owners and operators using the type of PFD pictured below inspect each PFD for this potential defect. If defects are discovered, owners and operators are encouraged to report their findings to the Coast Guard Office of Design and Engineering Standards via email (typeapproval@uscg.mil) and include the manufacturer, design number, lot numbers, the quantity of PFDs impacted, and the total number of unaffected PFDs onboard.

A full copy of the marine safety alert may be found here.

 

 

 

 

 

 

 

 

 

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.