traps in oil & gas litigationtraps in oil & gas litigation carroll g. martin scott, douglass...

TRAPS IN OIL & GAS LITIGATION

CARROLL G. MARTIN Scott, Douglass & McConnico, L.L.P.

One American Center, 15th Floor 600 Congress Avenue Austin, Texas 78701

Ph: 512.495.6300 Fax:512.474.0731

State Bar of Texas 32ND ANNUAL

ADVANCED OIL, GAS & ENERGY RESOURCES LAW COURSE

October 2 - 3, 2014 Houston

CHAPTER 7

CARROLL MARTIN Scott, Douglass & McConnico, L.L.P.

15th Floor, One American Center, 600 Congress Avenue, Austin, Texas 78701-3234

512.495.6300 512.474.0731 (Fax) E-mail: [email protected]

Education: University of Texas (J.D., with honors, 1980) Duke University (B.A., History, magna cum laude, 1976) Bar Admissions:

Admitted to bar, November 1980, Texas; admitted to practice before the U.S. Temporary Emergency and Fifth Circuit Court of Appeals; U.S. District Court, Western and Southern Districts of Texas.

Specialization: Board Certified in Oil, Gas & Mineral Law, Texas Board of Legal Specialization (1986) Legal Employment: Partner, Scott, Douglass & McConnico, L.L.P. (1984-present) Associate, Scott, Douglass & Keeton (October 1980-1983) Professional Associations: Austin Bar and American Bar Associations State Bar of Texas and Austin Bar Oil, Gas & Mineral Law Sections Distinctions: AV- Rated Martindale-Hubbell America’s Best Lawyers (2009-2015) Texas Super Lawyer (2005; 2007; 2009-2014) Texas Law Foundation Life Fellow since 1996 Vice Chair, Oil & Natural Gas Exploration & Production Section of ABA's SONREEL 1994 Member, Interstate Oil & Gas Compact Commission (1991-1996) Areas of Law Practice:

Oil and gas, litigation and administrative law. Litigation experience in a variety of oil and gas matters including producer take-or-pay and price claims, operator/non-operator claims, and lessor/lessee disputes of all shapes and sizes. Administrative practice before many state agencies, including the Railroad Commission of Texas, General Land Office, and Texas Commission on Environmental Quality.

Mediator Training:

American Academy of Attorney-Mediators, Inc. -- general mediation (1994) Dispute Resolution Center of Austin -- civil litigation and family law training (1995) Harvard Law School's Summer Negotiation Workshop (June 1993)

Representative Publications and Presentations:

"Gas Royalty Issues: Who, What, How and When? Valuation and Payment in Today's Market," Southwestern Legal Foundation's Forty-Sixth Annual Institute on Oil and Gas Law and Taxation (1995).

“Yours, Mine, and Ours: Conflicts Between Mineral and Surface Estates,” Rocky Mountain Mineral Law Foundation’s 46th Annual Institute (2000).

“All for One and One for All: A Primer on Pooling,” 31st Ernest E. Smith Oil Gas and Mineral Law Institute (2005). Contributor to Environmental Law volumes of Texas Practice Series (2005) “What Works and What Doesn’t in Drafting Leases, 29th Annual Advanced Oil, Gas and Energy Resources Law Course (2011). AAPL (American Association of Petroleum Landman) Texas Pooling Seminars (2013-1014)

Representative Appellate Cases:

Musick v. Railroad Commission of Texas, 747 S.W.2d 892 (Tex. Civ. App.—Austin 1988, writ denied)

Day & Company, Inc. v. Texland Petroleum, Inc., 786 S.W.2d 667 (Tex. 1990)

Schwartz v. Prairie Producing, Inc., 833 S.W.2d 629 (Tex. App.—Houston [1st Dist.] 1992, writ dismissed after settlement)

Concord Oil Company v. Pennzoil Exploration & Production Company, 966 S.W.2d 451 (Tex. 1998)

King Ranch, Inc. v. Chapman, 118 S.W.3d 742 (Tex. 2003)

Coates Energy Trust v. Frost National Bank, Trustee, Cause No. 04-11-00838-CV (Tex. App. – San Antonio 2012, pet. denied)

Traps in Oil and Gas Litigation Chapter 7

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TABLE OF CONTENTS

I. INTRODUCTION ............................................................................................................................................. 1

II. KNOW WHO YOUR CLIENT IS ..................................................................................................................... 1 A. A Multiple Representation Hypothetical .................................................................................................... 1 B. Representation of Multiple Parties ............................................................................................................. 1 C. The First Important Rule – Rule 1.06, Conflict of Interest General Rule .................................................. 1 D. The Second Important Rule – Rule 1.05, Confidentiality of Information .................................................. 2 E. Joint Representation Situations In Oil and Gas Matters ............................................................................. 3

III. BE EXPLICIT WITH A PARTY WHO IS NOT YOUR CLIENT ................................................................... 4

IV. WRITE THE LETTER OR THE EMAIL ......................................................................................................... 4

V. BUSINESS TRANSACTION WITH A CLIENT ............................................................................................. 4

VI. THREE OTHER IMPORTANT RULES........................................................................................................... 5 A. Competent and Diligent Representation .................................................................................................... 5 B. Meritorious Claims and Contentions .......................................................................................................... 6 C. Candor Toward the Tribunal ...................................................................................................................... 7

VII. SOME COMMON ISSUES IN OIL AND GAS LITIGATION ........................................................................ 7 A. Overview .................................................................................................................................................... 7 B. Venue ......................................................................................................................................................... 8 C. An Oil and Gas Lease is Not an Adhesion Contract .................................................................................. 9 D. Duty of Good Faith and Fair Dealing ......................................................................................................... 9 E. The DTPA Does Not Apply to Joint Operating Agreements ................................................................... 10 F. Contractual Obligations May Survive an Assignment of Working Interests .......................................... 11 G. Who May Ratify a Pooled Unit? .............................................................................................................. 12 H. Trespass to Try Title or Declaratory Judgment ........................................................................................ 13

VIII. TRY NOT TO REPRESENT CROOKS.......................................................................................................... 14 A. The Investment Advisor or Seller ............................................................................................................ 14 B. Oil and Gas Working Interests are Securities .......................................................................................... 15 C. Know Your Client and the Transaction .................................................................................................... 15

IX. FIDUCIARY DUTY ........................................................................................................................................ 16

X. CONFLICTS OF INTEREST .......................................................................................................................... 17

XI. THE FILE BELONGS TO THE CLIENT ....................................................................................................... 17

XII. TOP 10 DISCIPLINARY COMPLAINTS ...................................................................................................... 17

XIII. CONCLUSION ................................................................................................................................................ 17


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TRAPS IN OIL AND GAS LITIGATION

I. INTRODUCTION

As attorneys we all know that our practice of law is guided by the Rules of Professional Conduct. We take a course in law school about these rules. We study for a section on the bar exam about these rules. Many of our continuing legal education programs have “ethics” presentations. My work on this article about “traps in oil and gas litigation” has reminded me that it is good for each of us to revisit some of the basic tenets of the Rules of Professional Conduct and consider how they relate to our respective law practices and may help us all to avoid “pitfalls.”

Three of the Rules that are particularly germane to the “everyday” work of oil and gas attorneys and trial lawyers are these: • Rule 1.01 Competent and Diligent Representation • Rule 3.01 Meritorious Claims and Contentions • Rule 3.03 Candor Toward the Tribunal After a refresher on these three rules of conduct, this article will discuss some specific issues in oil and gas lawsuits that seem to appear frequently in our everyday practices and provide some practice tips on these issues.

However, before delving into these three rules and specific oil and gas litigation issues, this article contains excerpts from my law partner Sam Johnson’s CLE article discussing certain Rules of Professional Conduct and steps to prevent legal malpractice claims.1 One of the most basic and important of these is – “know who your client is.” II. KNOW WHO YOUR CLIENT IS

One of the primary things each of us can do to prevent a legal malpractice claim is to be clear concerning who our client is in each engagement we undertake. Step one is to prepare an engagement letter stating who your client is – in other words, identify who you do represent and who you do not represent – and what the terms of the representation are. Then get it signed. Johnson estimates that in at least 30% of the legal malpractice cases he has defended, there has been a question concerning who the attorney’s client was. The question of who the lawyer represents most often arises when it appears the lawyer represents multiple parties.

1 Johnson, Sam, Ethical Considerations and

Malpractice Prevention for the Real Estate Attorney, ADV. REAL ESTATE SEMINAR, UNIV. OF HOUSTON CLE 2008-9.

A. A Multiple Representation Hypothetical The following scenario has given rise to a number

of legal malpractice claims. A, B and C go see Lawyer X and ask him to form the ABC partnership for them. Lawyer X does so (without an engagement letter). Sometime later, A and B get cross-wise with C. A and B now ask lawyer X what they can do to remove C from the partnership. Lawyer X (again, sans engagement letter) assists A and B in taking certain steps to take C out of the partnership.

Ultimately, C files a lawsuit against (i) A and B and (ii) lawyer X alleging that:

1) A and B improperly attempted to remove C from the partnership; and

2) lawyer X was negligent and violated his fiduciary duties in assisting A and B to remove C from the partnership.

The foregoing scenario might have been preventable if the lawyer had a written engagement agreement which addressed issues such as:

a) does the lawyer represent A, B and C individually?

b) does the lawyer only represent the partnership?

c) in what instances could the lawyer represent the partnership against any individual partner?

Consider this twist on the same basic facts. Before Lawyer X is asked to set up the limited partnership for A, B and C, Lawyer X first represents A, B and C, as co-lessors, in a lawsuit against an oil and gas lessee on their Ranch. This lawsuit settles. Lawyer X later is asked by A, B and C to set up the ABC partnership to hold their mineral interests in the Ranch. From that point, the original scenario described above plays out. In both scenarios, a written engagement letter could make the difference for Lawyer X if he is faced with a claim. B. Representation of Multiple Parties

Under the right circumstances, a lawyer may represent multiple parties in the same transaction. The primary ethics rules that must be met to represent more than one party in a transaction are Rules 1.05 and 1.06. C. The First Important Rule – Rule 1.06, Conflict

of Interest General Rule Rule 1.06 states:

(a) A lawyer shall not represent opposing

parties to the same litigation.


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(b) In other situations and except to the extent permitted by paragraph (c), a lawyer shall not represent a person if the representation of that person:

(1) involves a substantially related

matter in which that person’s interests are materially and directly adverse to the interests of another client of the lawyer or the lawyer’s firm; or

(2) reasonably appears to be or become

adversely limited by the lawyer’s or law firm’s responsibilities to another client or to a third person or by the lawyer’s or law firm’s own interests.

(c) A lawyer may represent a client in the

circumstances described in (b) if:

(1) the lawyer reasonably believes the representation of each client will not be materially affected; and

(2) each affected or potentially

affected client consents to such representation after full disclosure of the existence, nature, implications, and possible adverse consequences of the common representation and the advantages involved, if any.

(d) A lawyer who has represented multiple

parties in a matter shall not thereafter represent any of such parties in a dispute among the parties arising out of the matter, unless prior consent is obtained from all such parties to the dispute.

(e) If a lawyer has accepted representation

in violation of this Rule, or if multiple representation properly accepted becomes improper under this Rule, the lawyer shall promptly withdraw from one or more representations to the extent necessary for any remaining representation not to be in violation of these Rules.

(f) If a lawyer would be prohibited by this

Rule from engaging in particular conduct, no other lawyer while a member or associated with that lawyer’s firm may engage in that conduct.

Rule 1.06 (emphasis added). In this hypothetical, in determining whether you

can represent A, B and C in the each of the matters above, the first question you have to resolve is, are A, B and C’s interests “materially and directly adverse” to each other. Rule 1.06(b)(1). The second question is whether it “reasonably appears” that your responsibility to each of A, B and C will be “adversely limited” by your responsibilities to the other persons. Id.(b)(2).

If the answer to either of the foregoing questions is yes, under Rule 1.06, you cannot represent A, B and C in the first engagement unless (1) you reasonably believe the representation of each client will not be “materially affected;” and (2) each affected client consents to the representation “after full disclosure of the existence, nature, implications and possible adverse consequences of the common representation and the advantages involved, if any.”

Even if you obtain client consent to the joint representation of A, B and C, you still could later be sued by one of them contending that the joint representation was improper. The suing client could contend that a reasonable lawyer would not have concluded that the joint representation would not be “materially affected” and, therefore, you should not have asked A, B and C to consent to the joint representation.

Rule 1.06(d) makes clear that if you have represented joint clients (such as A, B and C) in a matter and a dispute arises among them concerning that transaction, you could later face a claim from one or more of the original joint clients if you represent any of them in that dispute - unless you obtain consent. And, it was objectively reasonable to seek consent. D. The Second Important Rule – Rule 1.05,

Confidentiality of Information When considering whether you can represent

multiple clients, keep in mind Rule 1.05. The definition of confidential information is important. Rule 1.05(a) defines confidential information as follows:

“Confidential Information” includes both “privileged information” and “unprivileged client information.” “Privileged information” refers to the information of a client protected by the lawyer-client privilege rule of Rule 503 of the Texas Rules of Evidence or of Rule 503 of the Texas Rules of Criminal Evidence or by the principles of the attorney-client privilege governed by Rule 501 of the Federal Rules of Evidence for United States courts and magistrates. “Unprivileged client information” means all information relating to a client or furnished by the client other than privileged


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information acquired by the lawyer during the course of or by reason of the representation of the client.

Rule 1.05(a) (emphasis added). As defined, “confidential information” means:

1) privileged information under the rules of evidence; and

2) all information relating to a client or furnished by the client, other than privileged information, acquired by the lawyer during the course of or by reason of the representation of the client.

A strict reading of this Rule indicates that any information a lawyer (i) has acquired that relates to the client and (ii) that the lawyer acquired “during the course of or by reason of the representation of the client” is confidential information. This is important because, under Rule 1.05, an attorney generally cannot reveal the confidential information of a client or a former client to third parties.

Rule 1.05 specifically provides:

Except as permitted by paragraphs (c), (d), or as required by paragraphs (e) and (f), a lawyer shall not knowingly: (1) reveal confidential information of a client or

a former client to:

(i) a person that the client has instructed is not to receive the information; or

(ii) anyone else, other than the client, the client’s representatives, or the members, associates or employees of the lawyer’s firm.

Rule 1.05(b) (emphasis added). Thus, a strict reading of Rule 1.05 indicates that a lawyer cannot reveal a client’s confidential information to anyone other than the client, the client’s representatives, or persons in the lawyer’s law firm.

When considering representing multiple parties, take these steps at the outset of the matter:

1) inform each client that you must keep that client’s information confidential and not share it with third parties;

2) inform each client that, because of the joint representation, you must freely share all information you receive from one client with the other clients who are part of the joint representation;

3) inform each client that, if each client had his own attorney, there would not be such sharing of confidential information; and

4) obtain the client’s consent to the sharing of confidential information among the clients to the joint representation (at least the types of information as is necessary for the representation to be effective as to all).

An engagement letter for multiple clients should address these confidential information issues and obtain consent for the lawyer to share confidential information among multiple clients. E. Joint Representation Situations In Oil and Gas

Matters Joint representation is commonplace in oil and gas

matters, including litigation – and cost effective for the clients. A lawyer may be asked to represent several (or all) mineral owners/lessors in a lease dispute with a lessee. On the other side of the case, the opposing lawyer may be asked to represent more than one lessee/working interest owner in the lease at issue. Similarly, multiple lessees/working interest owners may have a common claim or defense against another party – for example, in a leasehold title dispute with a party claiming under another lease claims or to enforce a preferential right under a joint operating agreement or other contract. Rights and obligations that arise under most oilfield agreements – from mineral deeds and leases to joint operating agreements and purchase and sale agreements – quite often involve multiple parties with common claims and defenses.

These aligned parties, also, almost always engage the attorney and describe their interests as in lock-step and aligned at the outset. But alignments can change and interests can diverge during the course of a lawsuit. It is important that you address this possibility with the parties and set the parameters of the representation even when the parties insist it will not be an issue.

One potential point of divergence is that one or more of the jointly represented parties may take different (and intractable) positions on settlement offers and counter-offers. Some of the joint clients may also differ on litigation or trial strategies – such as dropping weaker claims in favor of stronger ones – or deciding whether or not to pursue a summary judgment – or advocating differing forms of recovery or damage models that cannot be pursued in the alternative. At the outset of the engagement, the joint clients need to know that the attorney cannot serve as a referee of their disputes. Joint client also need to know, and agree, that, if withdrawal of the attorney from representation of one or more parties becomes necessary during the engagement, how that will be decided and which clients, if any, the attorney can continue to represent.


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III. BE EXPLICIT WITH A PARTY WHO IS NOT YOUR CLIENT The engagement letter is important and may help

avoid and address who the client is and how to handle issues that arise in joint representation. However, a written contract is not necessary to create an attorney-client relationship in Texas. Instead, an attorney-client relationship may be inferred from the conduct of the parties.

The legal relationship of an attorney and client is purely contractual and results from the mutual agreement and understanding of the parties concerned, based upon the clear and express agreement of the parties as to the nature of the work to be undertaken and the compensation agreed to be paid therefore . . . the contract of employment may be implied by the conduct of the two parties. . . . All that is required is that the parties explicitly or by their conduct manifest an intent to create the attorney-client relationship.

Parker v. Carnahan, 772 S.W.2d 151, 156 (Tex. App. – Texarkana 1989, writ denied), accord, Tanox, Inc. v. Akin Gump, 105 S.W.3d 244, 254 (Tex. App. – Houston [14th Dist.] 2003, pet. denied) (“the attorney-client relationship is a contractual relationship whereby an attorney agrees to render professional services for a client . . . the relationship may be expressly created by contract or it may be implied from the actions of the parties.”).

Attorneys have been sued in Texas by an alleged client even though:

a) the attorney did not charge the alleged client any attorneys’ fees;

b) the attorney did not have a representation letter with the alleged client; and

c) the attorney had not set up a file for the alleged client.

An alleged client can sue an attorney contending that the attorney-client relationship is “implied from the actions of the parties.” Id. Often the question will be whether the alleged client reasonably believed the attorney was his lawyer.

In situations in which you come to believe that there is a significant chance that a third party believes you are that third party’s attorney; and you are not that third party’s attorney, put that in writing promptly. Send that third party a letter explicitly stating that you do not represent that third party. In short, if you do not represent a party, let them know it. IV. WRITE THE LETTER OR THE EMAIL

“Put it in writing” is a good practice in many situations. Johnson estimates that in approximately 35% of the cases he defends, there is at least one swearing match where (1) the lawyer says he advised the client “X;” and (2) the client denies the lawyer

ever told the client “X.” For example, there are situations where:

a) lawyer represents a client in a real estate transaction;

b) the lawyer tells the client the lawyer is not a tax expert and cannot give the client any tax advice concerning that transaction;

c) the lawyer does not put this in writing; d) the transaction ultimately causes bad tax

consequences for the client; and e) the client sues the lawyer for causing these

bad tax consequences. In a litigation context, it is also important to spell out for the client what your areas of expertise are – and what they are not. If you do not know the tax consequences of a recovery that your client may receive, let them know that and encourage them to get advice on that issue from another expert.

In situation like these, a potentially difficult case could have been made a non-event if the lawyer had simply written a letter or email to the client documenting what the lawyer told the client. One of the most effective ways you can protect yourself from a legal malpractice case is be sure to write the letter or email on important matters so that you have a written record of your advice. V. BUSINESS TRANSACTION WITH A

CLIENT A lawyer needs to be particularly careful when he

enters into a business transaction with a client. Ethics Rule 1.08 provides:

(a) a lawyer shall not enter into a business transaction with a client unless:

(1) the transactions and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed in a manner which can be reasonably understood by the client;

(2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and

(3) the client consents in writing thereto.

Before a lawyer enters into a business transaction with a client, the lawyer must meet this three prong test.

If the client sues the lawyer over the business transaction, it will likely be the lawyer’s duty to prove that the “terms on which the lawyer [acquired] the interest are fair and reasonable.” There is case law


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holding that, when a lawyer enters into a business deal with his client, the deal is presumed fraudulent.

Before a lawyer enters into a deal with a client, the lawyer should give the client reasonable opportunity to seek the advice of independent counsel in the transaction. In some cases, it may be appropriate to insist that, prior to entering into the transaction, the client receive independent legal advice from another lawyer.

Under this rule, the client must consent to the transaction in writing. Thus, before entering into a business transaction with a client, document the transaction, and its fairness, in writing.

Rule 1.08 does not apply to standard commercial transactions between a lawyer and the client.

As a general principle, all transactions between client and lawyer should be fair and reasonable to the client. In such transactions, a review by independent counsel on behalf of the client is often advisable. Paragraph (a) does not however, apply to standard commercial transactions between the lawyer and the client for products and services the client generally markets to others such as banking or brokerage services, medical services, products manufactured or distributed by the client, and utility services. In such transactions, the lawyer had no advantage in dealing with the client, and the restrictions in paragraph (a) are unnecessary and impracticable.

Rule 1.08, comment 2 (emphasis added). Accordingly, in a transaction between a lawyer and a client involving “products and services the client generally markets to others,” an attorney generally does not need to worry about Rule 1.08. VI. THREE OTHER IMPORTANT RULES

Competency in the particular legal matter the client is asking you to handle is equally, if not more important, than knowing who you represent – and who you do not – and how to document your engagement terms and advice to your client. Competency, of course, includes, legal skills, but also the knowledge to discern a meritorious claim from a frivolous claim and to have candor with the court as to the law in support (and adverse) to your client’s positions.

The three rules cited at the beginning of this article relate to competency, merit and candor: • Rule 1.01 Competent and Diligent Representation • Rule 3.01 Meritorious Claims and Contentions • Rule 3.03 Candor Toward the Tribunal These rules, taken together, provide the foundation for the oil and gas practice tips portion of this paper. Each of these rules and relevant comments are printed in full below.

A. Competent and Diligent Representation Rule 1.101 provides:

(a) A lawyer shall not accept or continue

employment in a legal matter which the lawyer knows or should know is beyond the lawyer’s competence, unless:

(1) another lawyer who is competent to

handle the matter is, with the prior informed consent of the client, associated in the matter; or

(2) the advice or assistance of the lawyer is reasonably required in an emergency and the lawyer limits the advice and assistance to that which is reasonably necessary in the circumstances.

The comment to Rule 1.01 is more explicit and explains “competence” in some helpful detail. Significantly, it does not mean “board certified” in a particular area. Comment: Accepting Employment

1. A lawyer generally should not accept or continue employment in any area of the law in which the lawyer is not and will not be prepared to render competent legal services. Competence is defined in Terminology as possession of the legal knowledge, skill, and training reasonably necessary for the representation. Competent representation contemplates appropriate application by the lawyer of that legal knowledge, skill and training, reasonable thoroughness in the study and analysis of the law and facts, and reasonable attentiveness to the responsibilities owed to the client.

2. In determining whether a matter is beyond a lawyer’s competence, relevant factors include the relative complexity and specialized nature of the matter, the lawyer’s general experience in the field in question, the preparation and study the lawyer will be able to give the matter, and whether it is feasible either to refer the matter to or associate a lawyer of established competence in the field in question. The required attention and preparation are determined in part by what is at stake; major litigation and complex transactions ordinarily require more elaborate treatment than matters of lesser consequences.

3. A lawyer may not need to have special training or prior experience to accept


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employment to handle legal problems of a type with which the lawyer is unfamiliar. Although expertise in a particular field of law may be useful in some circumstances, the appropriate proficiency in many instances is that of a general practitioner. A newly admitted lawyer can be as competent in some matters as a practitioner with long experience. Some important legal skills, such as the analysis of precedent, the evaluation of evidence and legal drafting, are required in all legal problems. Perhaps the most fundamental legal skill consists of determining what kind of legal problems a situation may involve, a skill that necessarily transcends any particular specialized knowledge.

4. A lawyer possessing the normal skill and training reasonably necessary for the representation of a client in an area of law is not subject to discipline for accepting employment in a matter in which, in order to represent the client properly, the lawyer must become more competent in regard to relevant legal knowledge by additional study and investigation. If the additional study and preparation will result in unusual delay or expense to the client, the lawyer should not accept employment except with the informed consent of the client.

5. A lawyer offered employment or employed in a matter beyond the lawyer’s competence generally must decline or withdraw from the employment or, with the prior informed consent of the client, associate a lawyer who is competent in the matter. Paragraph (a)(2) permits a lawyer, however, to give advice or assistance in an emergency in a matter even though the lawyer does not have the skill ordinarily required if referral to or consultation with another lawyer would be impractical and if the assistance is limited to that which is reasonably necessary in the circumstances.

. . . . Maintaining Competence

8. Because of the vital role of lawyers in the

legal process, each lawyer should strive to become and remain proficient and competent in the practice of law. To maintain the requisite knowledge and skill of a competent practitioner, a lawyer should engage in continuing study and education. If a system of peer review has been established, the lawyer should consider making use of it in appropriate circumstances. Isolated instances

of faulty conduct or decision should be identified for purposes of additional study or instruction.

(Emphasis in original.) B. Meritorious Claims and Contentions

Rule 3.01 provides:

A lawyer shall not bring or defend a proceeding, or assert or controvert an issue therein, unless the lawyer reasonably believes that there is a basis for doing so that is not frivolous.

Comment:

1. The advocate has a duty to use legal procedure for the fullest benefit of the client’s cause, but also a duty not to abuse legal procedure. The law, both procedural and substantive, affects the limits within which an advocate may proceed. Likewise, these Rules impose limitations on the types of actions that a lawyer may take on behalf of his client. See Rules 3.02-3.06, 4.01-4.04, and 8.04. However, the law is not always clear and never is static. Accordingly, in determining the proper scope of advocacy, account must be taken of the law's ambiguities and potential for change.

2. All judicial systems prohibit, at a minimum, the filing of frivolous or knowingly false pleadings, motions or other papers with the court or the assertion in an adjudicatory proceeding of a knowingly false claim or defense. A filing or assertion is frivolous if it is made primarily for the purpose of harassing or maliciously injuring a person. It also is frivolous if the lawyer is unable either to make a good faith argument that the action taken is consistent with existing law or that it may be supported by a good faith argument for an extension, modification or reversal of existing law.

3. A filing or contention is frivolous if it contains knowingly false statements of fact. It is not frivolous, however, merely because the facts have not been first substantiated fully or because the lawyer expects to develop vital evidence only by discovery. Neither is it frivolous even though the lawyer believes that the client’s position ultimately may not prevail. In addition, this Rule does not prohibit the use of a general denial or other pleading to the extent authorized by applicable rules of practice or procedure. . .


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4. A lawyer should conform not only to this Rule’s prohibition of frivolous filings or assertions but also to any more stringent applicable rule of practice or procedure. For example, the duties imposed on a lawyer by Rule 11 of the Federal Rules of Civil Procedure exceed those set out in this Rule. A lawyer must prepare all filings subject to Rule 11 in accordance with its requirements. See Rule 3. 04(c)(1).

C. Candor Toward the Tribunal

Rule 3.03 provides:

(a) A lawyer shall not knowingly:

(1) make a false statement of material fact or law to a tribunal;

(2) fail to disclose a fact to a tribunal when disclosure is necessary to avoid assisting a criminal or fraudulent act;

(3) in an ex parte proceeding, fail to disclose to the tribunal an unprivileged fact which the lawyer reasonably believes should be known by that entity for it to make an informed decision;

(4) fail to disclose to the tribunal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not disclosed by opposing counsel; or

(5) offer or use evidence that the lawyer knows to be false.

(b) If a lawyer has offered material evidence and

comes to know of its falsity, the lawyer shall make a good faith effort to persuade the client to authorize the lawyer to correct or withdraw the false evidence. If such efforts are unsuccessful, the lawyer shall take reasonable remedial measures, including disclosure of the true facts.

(c) The duties stated in paragraphs (a) and (b) continue until remedial legal measures are no longer reasonably possible.

Comment:

1. The advocate’s task is to present the client’s case with persuasive force. Performance of that duty while maintaining confidences of the client is qualified by the advocate’s duty of candor to the tribunal.

Factual Representations by Lawyer

2. An advocate is responsible for pleadings and other documents prepared for litigation, but is usually not required to have personal knowledge of matters asserted therein, for litigation documents ordinarily present assertions by the client, or by someone on the client’s behalf, and not assertions by the lawyer. Compare Rule 3.01. However, an assertion purporting to be on the lawyer’s own knowledge, as in an affidavit by the lawyer or a representation of fact in open court, may properly be made only when the lawyer knows the assertion is true or believes it to be true on the basis of a reasonably diligent inquiry. There are circumstances where failure to make a disclosure is the equivalent of an affirmative misrepresentation. The obligation prescribed in Rule 1.02(c) not to counsel a client to commit or assist the client in committing a fraud applies in litigation.

See the Comments to Rules 1.02(c) and 8.04(a). Misleading Legal Argument

3. Legal argument based on a knowingly false representation of law constitutes dishonesty toward the tribunal. A lawyer is not required to make a disinterested exposition of the law, but should recognize the existence of pertinent legal authorities. Furthermore, as stated in paragraph (a)(4), an advocate has a duty to disclose directly adverse authority in the controlling jurisdiction which has not been disclosed by the opposing party. The underlying concept is that legal argument is a discussion seeking to determine the legal premises properly applicable to the case.

VII. SOME COMMON ISSUES IN OIL AND GAS LITIGATION

A. Overview The foregoing three rules of conduct regarding

competency, meritorious claims and candor before the tribunal provide a foundation for an attorney to connect his ethical and professional responsibilities with the substantive knowledge of his area of law. In this case, of course, the substantive area is oil and gas law – specifically litigation. In this portion of the paper, I


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will identify common areas of confusion that seem to appear frequently in our everyday practices and provide some practice tips on these issues. B. Venue

Venue in in oil and gas litigation is not always mandatory in the county where the land involved in the lease, operating agreement or other contract is located. Many attorneys automatically assume the mandatory venue provision, Tex. Civ. Rem. Code Ann. §15.011 applies. Section 15.011 currently reads:

Actions for recovery of real property or an estate or interest in real property, for partition of real property, to remove encumbrances from the title to real property, for recovery of damages to real property, or to quiet title to real property shall be brought in the county in which all or a part of the property is located.

However, this provision does not apply to every oil and gas lease or contract dispute. The nature of the claims under the oil and gas lease or other contract matters. Claims not listed in the statute fall within the general venue provisions so that those permissive rules apply. Yzaguirre v. KCS Resources confirms that the mandatory venue provision does not apply to every lease dispute. 53 S.W.3d 368 (Tex. 2001). In Yzaguirre, the lessee sued for a declaratory judgment to determine whether the lessee owed royalty payments under the leases based on a market value price at the time of sale or on the actual sales proceeds received by lessee. The case reached the Supreme Court after the district court denied a motion to transfer venue and then granted a motion for summary judgment for lessee KCS. The rulings were affirmed by the court of appeals and lessors appealed to the Supreme Court. The Court described the venue issue as “whether venue was appropriate in Dallas County even though the mineral estates at issue are located in Zapata County.” Id. at 371. One or more of the royalty owners resided in Dallas County.

The royalty owners, seeking to transfer venue of the case to the county where the leased lands were located, claimed that the royalties issue raised a question of “interest in real property” and the mandatory venue provision required the case be moved to Zapata County. KCS argued the issue was one of payment – not real property, but personal property. The Supreme Court agreed with KCS: “The substance of this dispute is about the obligations KCS owes to the Royalty Owners under the terms of the leases, not the boundaries of the leases or the percentage of the Royalty Owners’ royalties. Id. citing Texas Oil & Gas Corp. v. Moore, 630 S.W.2d 450, 452-53 (Tex. App. – Corpus Christi 1982, writ dism’d w.o.j. (“[C}laims for

past and accrued royalties are properly characterized as claims to recover personalty . . . “).

The plaintiff’s choice of venue stands unless the challenged by a defendant’s proper motion to transfer venue. Missouri Pac. R.R., 998 S.W.2d 212, 216 (Tex. 1999). A “proper” motion for venue must specifically deny the venue facts pleaded. TEX. R. CIV. P. 87(2)(b). The trial court rules based on the pleadings and affidavits. Id. Rule 87(3)(b). To show venue is mandatory under section 15.011, the plaintiff must allege and provide prima facie proof (1) that the nature of the suit fits within those listed in the statute, and (2) that all or part of the real property at issue is in the county where the suit is filed. In Re Stroud Oil Properties, Inc., 110 S.W.3d 18, 24 (Tex.App.- Waco 2002 (orig. proceeding) (holding a joint development agreement covering mineral properties created a cloud on title and was subject to the mandatory venue provision.)

Although a party’s pleadings provide the basis for a venue ruling, the court will make its own assessment of the essence of the claims filed and not allow “artful pleading” to avoid the mandatory venue provision. In Re Brin & Brin, P.C., 2013 WL 3895365 *7 (Tex. App. – Corpus Christi 2013, orig. proceeding). This case involved a lawyer’s claim for a share of a fee from his prior law firm. The fee agreement had provided the client would pay the law firm a sum of money described as (1) 25% of any bonus if the lease termination suit resulted in a new lease and (2) a 1/32 overriding royalty interest.

Even though the lawyer-plaintiff pleaded only for a money recovery from his former firm and partners, the court of appeals held the suit was essentially over the “rightful ownership” of the royalty interest the client had assigned to the law firm. Accordingly, the mandatory venue provision required the suit to be brought in La Salle County, the situs of the real property interest conveyed to the firm. Id. *8. See also In Re Momentum Energy Corp., 2007 WL 881503 (Tex. App. – Corpus Christi 2007, orig. proceeding) (holding that a suit for damages under a surface agreement was a claim for “damages to real property” covered by §15.011.

The type of action is not determinative of venue either. A declaratory judgment action may be subject to the mandatory venue provision if the essence of the dispute involves quieting title to the land. In Re Applied Chemical Magnesias Corporation, 206 S.W.3d 114 (Tex. 2006) (Holding that declaratory judgment suit to determine the rights to a contract to acquire surface and mineral leases is an action subject to the mandatory venue rule.


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C. An Oil and Gas Lease is Not an Adhesion Contract Some commentators and attorneys have taken the

position that an oil and gas lease can be an adhesion contract. An oil and gas lease is, in fact, a contract. But it is not an adhesion contract under Texas law. Texas law defines a contract of adhesion as one in which one party has no bargaining power or ability to affect or change the contract terms. In re H.E. Butt Grocery Co., 17 S.W.3d 360, 370-71 (Tex. App. Houston [14th Dist.] 2000, orig. proceeding).

Professor David Pierce attributes the premise that an oil and gas lease is an adhesion contract to Professor Maurice Merrill, who wrote The Law Relating to Covenants Implied in Oil and Gas Leases. Professor Merrill would contend that the law of implied covenants in oil and gas leases is necessary because of the unequal bargaining positions of the lessor and lessee. Implied covenants may be implied in fact or implied in law. The first type is implied to complete a contract that is incomplete in terms and the second is to make an “unfair” contract “fair”.2

Professor Pierce, who fundamentally disagrees with Merrill’s position on both factual and legal grounds, writes: “Even if one accepts Professor Merrill’s premise that an oil and gas lease is an adhesion contract, this is simply the beginning of the analysis, not the end. Adhesion contracts are enforceable like any other contract. The ‘contract law’ test used to identify the unenforceable adhesion contract is unconscionability.”3 Pierce would limit judicial intervention to change or rewrite the parties’ contract to situations involving unconscionability.

The Colorado case of Rogers v. Westerman Farm Co., 29 P.3d 887 (Colo. 2001), is criticized by Professor Pierce as an example of the implied in law approach supplanting the legal principal of freedom of contract. In Rogers, the Colorado Supreme Court, sitting en banc, used the implied covenant to market to override express language in the oil and gas lease that royalty was to be paid on the value of the gas at the well. The resulting rule is referred to as “marketable condition” rule. The justification given by the Rogers court was unequal bargaining power between the lessor and lessee parties.

The Rogers opinion created new law regarding the allocation of transportation costs in gas lease royalty valuation. Invoking the implied covenant to market, the

2 See Scott Lansdown’s excellent discussion of

Professor Maurice Merrill’s characterization of an oil and gas lease as an “unfair bargain" and Professor David Pierce’s refutation of Professor Merrill’s position. Lansdown The Implied Covenant to Market: A Few Years Later, 4 TEX. J. OIL GAS & ENERGY L. (2009).

3 Id. at 305.

court imposed on the lessee a duty to incur the costs necessary to deliver a marketable product to a marketable location away from the well. Id. at 900 (“. . . if gas is not marketable at the physical location of the well . . . then the lessee has not met its burden of making the gas marketable. Thus, transportation costs may not be deducted from royalty payments.”). The lessee must meet this implied obligation cost-free to the royalty owners.

The Rogers decision cuts against prior case law and commentary on gas lease royalty valuation, which generally holds that lessees may deduct transportation costs from the wellhead, and do not owe royalty on value added by transportation of the gas. The Texas case of Heritage Resources, Inc. v. NationsBank, is a more traditional analysis of the issue of deductibility of transportation costs. 939 S.W.2d 118 (Tex. 1996).

In discussing its analysis of the issue of allocation of costs and the impact of express lease language such as “at the well” or “at the mouth of the well”, the Rogers court noted that other jurisdictions, including Texas, took a contrary view and held these terms established shared costs between lessor and lessee:

Texas law supports the view that “at the well” establishes the point of valuation at the physical location at the mouth of the well. Martin v. Glass, 571 F.Supp. 1406, 1411 (N.D. Tex. 1983). In Martin, the court concluded that under Texas law, post-production costs are properly deducted from royalty payments under an “at the well” lease. Id. at 1411-16. That court further concluded that because gas is “produced” when it is severed at the wellhead, and the lessee's duty to market gas ends when gas is produced, the compression costs at issue were incurred subsequent to production, and thus, were properly deductible from royalty payments as post-production costs. Id. at 1415-17; see also Judice v. Mewbourne Oil Co., 939 S.W.2d 133, 136 (Tex. 1996) (“Value at the well means the value of the gas before it has been compressed and before other value is added in preparing and transporting the gas to market.”). 29 P.3d at 901.

D. Duty of Good Faith and Fair Dealing

The Texas Supreme Court has rejected the notion that there is a general implied covenant of good faith and fair dealing in all contracts. English v. Fischer, 660 S.W.2d 521, 522 (Tex. 1983). “Texas law does not impose a general duty of good faith and fair dealing in contracts, including oil and gas leases.” Arabella Petroleum Co., L.L.C. v. Baldwin, 2012 WL 2450803, at p. 4 (Tex. App.—San Antonio 2012, no pet.);


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Amoco Prod. Co. v. Alexander, 622 S.W.2d 563, 567 (Tex. 1983).

A duty of good faith and fair dealing in the performance of contract obligations only arises in limited situations under Texas law, such as that between an insured and insurer. Arnold v. National County Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex. 1987). Unless the express terms of the lease itself creates a trust under the law or sets a fiduciary standard for the lessee’s performance of an express covenant, the standard of conduct of the lessee is not that of a fiduciary and thus cannot give rise to a duty of good faith and fair dealing. See Manges v. Guerra, 673 S.W.2d 180, 183-84 (Tex. 1984); Hurd Enters. Ltd. v. Bruni, 828 S.W.2d 101, 108 (Tex. App.--San Antonio 1992, writ denied).

“Texas courts have specifically held that unless the lease document itself creates in law a trust, or unless a relationship of trust and confidence necessarily results from the lessor/lessee relationship, the standard of conduct of the lessee cannot be appropriately categorized as fiduciary and thus cannot give rise to a duty of good faith and fair dealing.” Green v. Gemini Exploration Co., 2003 WL 1986859, at p. 3 (Tex. App.—Austin 2003, no pet.) (collected authorities). Another court of appeals has held that a lessee does not owe overriding royalty owner a duty of good faith and fair dealing. See Stroud Production, L.L.C. v. Hosford, 405 S.W.3d 794, 804-811 (Tex. App.—Houston [1st Dist.] 2013, no pet.). There is a good general discussion of duty of good faith and fair dealing and its limited application under Texas contracts, of all types, in City of Midland v. O’Bryant, 18 S.W.3d 209, 215-216 (Tex. 2000)

There is, however, one oil and gas lease contract provision that imposes an element of “good faith” – the power to pool. Vela v. Pennzoil Producing Co., 723 S.W.2d 199, 206 (Tex.App.--San Antonio 1986, writ ref'd n.r.e.). This is not, however, a fiduciary standard. Instead, the lessee must “exercise the pooling power in good faith, taking into account the interest of both lessee and lessor.” Circle Dot Ranch, Inc. v. Sidwell Oil and Gas, Inc., 891 S.W.2d 342, 346 (Tex. App.—Amarillo 1994, writ denied) (emphasis added). In Sidwell, the lessee argued that the duty of good faith in pooling oil and gas leases had been rejected in Amoco Production Co. v. Alexander, 622 S.W.2d 563, 568 (Tex. 1981), when the Court wrote that "[t]he standard of care in testing the performance of implied covenants by lessees is that of a reasonably prudent operator under the same or similar facts and circumstances." Id. at 567-68. The Sidwell court disagreed and described the good faith as a part of the reasonable, prudent operator standard in the pooling context. The issue of good faith is a fact issue. 891 S.W.2d at 347.

In Donnan v. Atlantic Richfield, the court considered an unleased mineral owner’s claim to

receive a share of past production from a pooled unit well. 732 S.W.2d 715 (Corpus Christi 1987, no writ). The Donnans held an undivided, unleased interest in land that was included within the pooled unit. The Donnans’ land was not a drillsite tract. Atlantic Richfield and the other defendant, each owning separate leases had entered into a pooling agreement to declare the pooled unit. By its leased interests, Atlantic Richfield was a co-tenant of the Donnans.

The plaintiff appealed from a summary judgment for the defendants and contended there was a fact issue as to whether the defendants had “failed to act in good faith and deal fairly with the Donnans.” Id. at 716. The court affirmed the summary judgment and held that there is no “fiduciary or agency relationship between cotenants” and “no duty to inform the Donnans of the leasing.” Id. Accordingly, the Donnans had no right to revenue from the well because they had no contractual relationship with any of the owners in the pooled lands and the well was not drilled on the Donnans’ tracts.

E. The DTPA Does Not Apply to Joint Operating

Agreements Numerous Texas courts have held that a non-

operating working interest owner is not a “consumer” under the Texas Deceptive Trade Practice Act (“DTPA”). Hamilton v. Texas Oil & Gas Corp., 648 S.W.2d 316, 322 (Tex. App.—El Paso 1982, writ ref’d n.r.e.); Johnston v. America Cometra, Inc., 837 S.W.2d 711, 717 (Tex. App.—Austin 1992, writ denied) (non-operating working interest owner under standard JOA not a “consumer”).

To assert a claim under the DTPA, the party must meet the definition of “consumer” in the law, which is, in relevant part: “an individual, partnership or corporation . . . who seeks or acquires by purchase or lease, any goods or services.” TEX. BUS. & COM. CODE §17.54(a). The plaintiff must show that it sought or acquired goods or services and that those goods or services are the basis for the complaint. “An investor under an oil and gas joint operating agreement is not, as a matter of law, a ‘consumer’ of services as contemplated within the DTPA”). Anderson v. Vinson Exploration, Inc., 832 S.W.2d 657, 665 (Tex. App.—El Paso 1992, writ denied).

The courts have considered the nature of the services being provided by the operator and characterized these as “basically administrative, managerial and supervisory.” C & C Partners v. Sun Expl. and Prod. Co., 783 S.W.2d 707, 712-13 (Tex. App.—Dallas 1990, writ denied). This analysis has been followed by most courts. However, there are a few cases that have purported to apply the DPTA to oil and gas investor transactions, but have denied recovery. Vick v. George, 671 S.W.2d 541, 551-52 (Tex. App.—San Antonio 1983, rev’d on other grounds) 686 S.W.2d 99, 100 Tex. 1984; (plaintiffs


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were investors in a well but there was no joint operating agreement between plaintiff and defendant).

The Fifth Circuit assumed the application of the DTPA to a non-operator claim against an operator but held the trial court had properly dismissed the claims. Calpetco 1981, Ltd. v. Marshall Exploration, Inc., 99 F.2d 1408, 1417 at n. 22 (5th Cir. 1993). In this opinion, the 5th Circuit panel noted that “recent decisions of the Texas courts of appeal indicate that Calpetco may not qualify as a ‘consumer’ under the DTPA . . . . However, for our analysis, we assume, without deciding, that Calpetco is a DTPA consumer.” The trend the 5th Circuit noted in “recent decisions of the Texas courts” – that the DTPA did not apply to claims arising under a joint operating agreement – has held. F. Contractual Obligations May Survive an

Assignment of Working Interests The general rule in contract law is that a party’s

contractual obligations under the contract will survive the assignment. See W. Oil Sales Corp. v. Bliss & Wetherbee, 299 S.W. 637, 638 (Tex. Comm’n App. 1927, judgm’t adopted); see also 29 Richard A. Lord, Williston on Contracts §74.30, at 436-438 (4th Ed. 2003). Texas’ Business and Commerce Code recognizes this same principle in §2.210 (a): “No delegation of performance relieves the party delegating of any duty to perform or any liability for breach.”

To avoid this result, the contract must include an express release of the obligations. This was the issue presented in Seagull Energy E&P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342, 344-46 (Tex. 2006). Eland Energy, a non-operator in a joint operating agreement with Seagull Energy as operator, sold and assigned its working interests to a third party, Nor-Tex. When Nor-Tex failed to pay its joint interest billings, Seagull sued both Eland and Nor-Tex.

Seagull argued the general rule applied and that the operating agreement did not expressly release a non-operator from its payment obligations after such an assignment. Eland argued that the general rule of continued liability after assignment did not apply because the use of the term “Participating Interest” throughout the operating agreement expressed that liability was limited to current owners.

The trial court, and more importantly, the Texas Supreme Court agreed with Seagull holding that an assignor of a working interest subject to a joint operating agreement remains liable to the operator unless the operating agreement provides otherwise. Both Nor-Tex, the assignee and Eland, the assignor, were owed Seagull for the unpaid expenses

The Seagull opinion also noted that the subject matter of a particular contract may also evidence no continuing liability after assignment. The example given was drawn from the Restatement of Property: “a

promise to maintain a dam on one’s property to provide a certain water level for a neighbor would cease upon the conveyance of the land.” This result is logical as performance requires continued possession of the land.

The Seagull rule depends on the absence of express language. Seagull involved an offshore operating agreement.. A different result occurred in Indian Oil Co., L.L.C. v. Bishop Petroleum, Inc., 406 S.W.3d 644, 656-658 (Tex. App.—Houston [14th Dist.] 2013, pet. denied). The court of appeals found sufficient express language in the onshore lands operating agreement.

In Indian Oil Co, the assignor of working interest was held liable for obligations incurred before the assignment, but was relieved of liability for expenses incurred after the assignment. The quoted language from the agreement tracks language found in the AAPL 1989 model form Article VIII.D:

[N]o assignment or disposition of interest by a party shall relieve such party of obligations previously incurred by such party hereunder with respect to the interest transferred, including without limitation the obligation of a party to pay all the costs attributable to an operation conducted hereunder in which such party has agreed to participate prior to making such assignments.

Significantly, the assignor had not consented to some of the particular operations at issue – including a workover - that was proposed and undertaken after the sale, but its assignee had consented. The assignor was not liable for the workover expenses but was liable for other operating expenses it incurred prior to sale under this language.

Applying the Seagull rule, a federal district court found no express release of liability in the parties’ operating agreement and held the assignors liable for well plugging costs that their assignee, who had filed for bankruptcy, did not pay. GOM Shelf, LLC v. Sun Operating Limited Partnership, 2008 WL 901482 at p. 9-11 (S.D. Tex. 2008). Notably, this agreement was also for offshore operations form and contained the following provision:

The assignment of any such interest shall not relieve the assignor making such assignment of any responsibility or liability hereunder accruing on or prior to the execution, delivery and approval by lessor, if required, of such assignment unless consented to in writing by all of the parties then owning and holding interests in said leases, permits and areas.


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Should any party hereto sell its entire interest in the leases, permits and area, then the party so disposing of its interest shall be relieved of all obligations hereunder which accrue subsequent to the date of delivery to the purchaser of the written assignment or conveyance of such interest, approved by lessor if such approval is required, provided that the party disposing of it entire interest has fully paid its share of all costs incurred or accrued hereunder to the time of such sale. (Emphasis added.)

The district court found that the obligation accrued prior to the time of sale, but also held that, even if the obligation arose after the date of sale, the second quoted paragraph of the agreement was not a “valid release” or “express release” under Texas law despite the highlighted language because “the operating agreement simply does not explain the consequences of an assignment of working interest to a third party.” Id. at 10 (quoting Seagull, 207 S.W.2d at 346.)

The practice point for attorneys advising a client about a prospective operating agreement or other contract is to carefully consider the language to be used when the contract is being prepared or offered for signing. If the issue of retained or released liability arises later, the express language in the contract will determine the outcome G. Who May Ratify a Pooled Unit?

Nonparticipating royalty interest owners (NPRIs) have the option to ratify pooled units and participate in production from a well outside the NPRI’s tract. Ruiz v. Martin, 559 S.W.2d 839 (Tex. Civ. App.―San Antonio 1977, writ ref’d n.r.e.); MCZ, Inc. v. Triolo, 708 S.W.2d 49 (Tex. Civ. App.―Houston [1st Dist.] 1986, writ ref’d n.r.e.). A more difficult question that has not been addressed directly by any Texas court is whether a non-drillsite, working interest owner may ratify a unit and participate in pooled unit production.

The Texas Supreme Court has held that the right of a mineral interest owner to an interest in production outside of the owner’s tract can only be created by contract. The Superior Oil Co. v. Roberts, 398 S.W.2d 276 (Tex. 1966). The contract to be ratified by an unleased mineral owner would appear to be the lease covering such acreage; by ratifying this lease, the previously unleased owner may become a unit royalty owner through the lease. An unpooled, leased interest may be limited to ratifying the unit agreement or declaration as a means of obtaining participation in the unit well. If this analysis correctly reflects Texas law, then the terms of the applicable unit agreement/declaration become critical.

Is the unit declaration or agreement to be interpreted as an offer to other mineral interests within

the unit boundaries to join in such production by ratification? If so, then these non-pooled interests may be able to accept the offer and participate in unit production by contract. See Ruiz v. Martin, supra; Whitworth, P., How To Deal With Non-Consenting Mineral Interests, 15th Annual Oil & Gas Institute (1989). However, if the unit agreement or declaration is drafted to refute the making of an offer, then there may not be any ratification opportunity. See Standard Oil Co. v. Donald, 321 S.W.2d 602 (Tex. Civ. App.―Fort Worth 1959, writ ref’d n.r.e.), in which the court suggested a right to ratify or repudiate may exist if the lease contract is properly drafted.

These issues were raised in the case of Fletcher v. Ricks Exploration, 905 F.2d 890 (5th Cir. 1990). Fletcher owned a lease on an undivided one-fourth mineral interest under a 100-acre tract. Ricks Exploration and others owned a lease covering an undivided one-half mineral interest under a 30-acre tract. The 30-acre tract was within the 100-acre tract. Ricks and others filed a pooled gas unit declaration which included the 30-acre tract. In an attempt to participate in the pooled unit, Fletcher signed and recorded a ratification of the unit. Ricks and its non-operating working interest owners did not recognize Fletcher’s ratification. Fletcher sued, claiming he was entitled to participate in the unit. The district court denied Fletcher’s claim, and the Fifth Circuit affirmed. The court stated that mere preparation and filing of a unit declaration did not constitute an offer to all persons holding leases on land within the designated acreage to join in the unit. Accordingly, there was no offer for Fletcher to accept by his filing a ratification. In declining to grant relief to Fletcher, the Fifth Circuit pointed out that Fletcher had other remedies available, including the self-help of drilling his own well on his acreage and the Mineral Interest Pooling Act to seek force pooling.

Although not entirely consistent, Texas courts have generally applied a contractual analysis to questions presented by the participation, and extent of participation, of non-participating royalty interests (NPRI’s) in pooled unit or community lease production. See Montgomery v. Rittersbacher, supra; Minchen v. Fields, 345 S.W.2d 282 (Tex. 1961). The underlying theory for these court holdings, including those applicable to cost-bearing interests, were addressed in The Superior Oil Co. v. Roberts, supra: that the lease purports to cover all mineral interests within the described lands even though the executive/lessor has no authority to bind such interest. By purporting to bind these interests, the executive/lessor is effectively offering these NPRI’s the option of either being bound by these contractual terms or rejecting them. See Ruiz v. Martin, supra.

This rationale has provided an NPRI with the option to ratify the lease if the well is outside his lands


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and participate in production on a pooled-unit basis or refrain from ratifying if the well is drilled on his tract. MCZ, Inc. v. Triolo, supra. In the MCZ case, the court upheld the NPRI’s ratification of the pooled unit as to one well located outside the NPRI’s tract and the NPRI’s right to receive royalty on an undiluted, unpooled basis for the production from a different well drilled on his tract. H. Trespass to Try Title or Declaratory Judgment

A common issue in oil and gas lawsuits is a dispute as to the proper form of action. Is trespass to try title the only cause of action available to determine a title dispute? No. While the trespass to try title statute is one cause of action to resolve oil and gas ownership disputes arising under deeds, leases, option agreements and other contracts, it is not the only appropriate procedure where title is implicated. In cases where construction or validity of a contract is involved, declaratory judgment is a proper cause of action. The issue is often disputed because attorney’s fees may be awarded in a declaratory judgment action but not in a trespass to try title suit.

Under the plain terms of the declaratory judgment statute, the construction of deeds and other contracts is a proper matter for declaratory judgment:

A person interested under a deed, will, written contract, or other legal writings constituting a contract or whose rights, status, or other legal relations are affected by a statute, municipal ordinance, contract, or franchise may have determined any question of construction or validity arising under the instrument, statute, ordinance, contract, or franchise and obtain a declaration of rights, status or other legal relations thereunder. TEX. CIV. PRAC. & REM. CODE § 37.004(a) (emphasis added).

The fact that the statute expressly lists construction of deeds as a proper area for declaratory judgment indicates that it contemplates determination of some title issues.

If the parties contend they have rights that are affected by a particular oil and gas contract or instrument and the Court must interpret or construe the contract or instrument to determine resolve the case, the dispute falls within the scope of §37.004(a). The fact that the ultimate result of a contractual dispute means that one party will own the interest at issue does not necessarily mean the case involves title to land that can only be resolved by a trespass to try title claim. A dispute over an option contract is an example of one that may be determined by declaratory judgment. See McPhail v. Tex. Arch. Aggregate, Inc., 573 S.W.2d 893, 896 (Tex.App.—Eastland 1978, no writ) (trial

court properly issued a declaratory judgment construing an option to purchase land). See McCaleb v. Wyatt, 257 S.W.2d 880, 881 (Tex.Civ.App.—Fort Worth 1953, writ ref’d n.r.e.)(“Appellant did not, by the option contract, acquire any title to the land. At most, he secured only the right to acquire an interest in the land by complying, at his election, with the stipulations on his part.”)

The Supreme Court of Texas held that trespass to try title is the exclusive procedure for resolving boundary disputes, but also noted that the declaratory judgment act “provides an efficient vehicle for parties to seek a declaration of rights under certain instruments.” Martin v. Amerman, 133 S.W.3d 262, 265 (Tex. 2004). Attorneys may advocate that under Martin v. Amerman declaratory judgment is never available to resolve any disputes involving title, but the case law does not support such a broad categorical contention. See, e.g., EOG Resources, Inc. v. Killam Oil Co., Ltd., 239 S.W.3d 293, 304 (Tex. App.—San Antonio 2007, pet. denied) (affirming award of attorneys’ fees for declaratory judgment where party “had asked for declaratory relief related to its trespass to try title action”); Cadle Co. v. Ortiz, 227 S.W.3d 831, 837-838 (Tex.App.—Corpus Christi 2007, pet. denied) (affirming award of attorneys’ fees and explaining: “While it is true that the dispute over the deed’s validity ultimately implicates title, much of contract and deed construction implicates title, and that does not indicate that all such cases are trespass to try title suits. Such an interpretation would render the DJA meaningless.”); Roberson v. City of Austin, 157 S.W.3d 130, 136-137 (Tex. App.—Austin 2005, pet. denied) (holding that dispute over validity of easement could be brought as declaratory judgment because to “do otherwise would render the UDJA language concerning its use in determining the validity of deeds meaningless”).

Before Martin v. Amerman, Texas courts rendered declaratory relief on various title-related issues and allowed awards of attorney’s fees in such cases. See Supak v. Zboril, 56 S.W.3d 785, 792 (Tex. App.—Houston [14th Dist.] 2001, no pet.) (affirming award for attorney’s fees in title case involving implied dedication of property and rejecting argument that such a claim was “classic trespass to try title material”); Steel v. Walker, 993 S.W.2d 376, 381 (Tex. App.—Tyler 1999, pet. denied) (affirming award of attorney’s fees in declaratory judgment suit regarding title); Duncan Land & Exploration, Inc. v. Littlepage, 984 S.W.2d 318, 333-334 (Tex. App.—Fort Worth 1998, pet. denied) (affirming award of attorney’s fees in declaratory judgment action involving cloud on title and slander of title).

In an analogous case, the Fifth Circuit held that trespass to try title was not the exclusive procedure to resolve a title dispute where establishing title involved


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the construction or validity of an instrument as a threshold matter. In re Juan Lino Garza, 90 Fed. Appx. 730, 2004 WL 249596, *4 (5th Cir. Feb. 10, 2004) (holding that declaratory judgment was proper, and attorneys’ fees properly awarded under the Act, because “declaratory relief was a necessary prerequisite to the Garzas’ claims”).

Treatises on title agree that declaratory judgment is a proper procedure to resolve certain title disputes. See F. Lange & A. Leopold, 5A Texas Practice, Land Titles and Title Examination (West 3rd ed. 2005). Lange and Leopold list various causes of action relating to land title, including suits to remove cloud or quiet title, suits in trespass to try title, and suits for declaratory judgment. Id. at §§ 42.1, 42.3-42.7. Lange and Leopold explain that a trespass to try title suit is a creature of statute and provides a legal remedy. Id. at § 42.4. The key to this cause of action is that the plaintiff has an immediate right of possession. A party seeking trespass to try title relief must recover on the strength of his own title and not on the weakness of the defendant’s title. Id. “Another vehicle that is available to persons seeking resolution of a real property dispute is an action for a declaratory judgment.” Id. at § 42.7. Lange and Leopold note that the Act “encompasses a wide range of issues in regard to land title disputes.” Id. (citing Salinas v. Gutierrez, 341 S.W.2d 558 (Tex. Civ. App.—San Antonio 1960, writ ref’d n.r.e.)). Trespass to try title is not the exclusive method to establish title in Texas.

Even those cases rejecting the application of the declaratory judgment statute consider whether there is a question of the construction or validity of an instrument and do not categorically reject application of the declaratory judgment statute whenever the subject matter is title. One such case is McRae Exploration & Production, Inc. v. Reserve Petroleum Co., 962 S.W.2d 676 (Tex. App.—Waco 1998, pet. denied). The opinion focuses on the substance of the declaratory relief sought, rather than the mere fact that there are title claims involved:

This suit involves a title dispute between competing deeds. It does not involve the construction or validity of the deeds. As such it is an action for trespass to try title and not for declaratory judgment.

Id. at 685 (emphasis added).

The McRae court did not categorically reject declaratory judgments just because there was a trespass to try title claim, but rather looked at the substance of the claims and determined that the suit was not truly a declaratory judgment because it did not involve the construction or validity of deeds. See also BP America Prod. Co. v. Marshall, 288 S.W.3d 430, 453 (Tex. App.—San Antonio 2008, pet. granted) (“When the

suit does not involve the construction or validity of deeds or other documents of title, the suit is not one for declaratory judgment.”); Barfield v. Holland, 844 S.W.2d 759, 771 (Tex. App—Tyler 1992, writ denied) (“There is in this suit no question of ‘construction’ or ‘validity’ of the deeds by which the Plaintiffs acquired their title, and this is therefore not a proper subject matter for declaratory judgment.”); Ely v. Briley, 959 S.W.2d 723, 725 n.1 (Tex. App.—Austin 1998, no pet.) (case involved whether severed mineral interest was subject to accretion; parties did not seek construction of the deed; court thus held that the case was in the nature of a trespass to try title not declaratory judgment); Southwest Guaranty Trust Co. v. Hard Road 13.4 Joint Venture, 981 S.W.2d 951, 957 (Tex. App—Houston [1st Dist.] 1998, writ denied) (no declaratory relief involved where plaintiff “did not seek to construe any terms of the lien or deed of trust”).

Trespass to try title is thus not the exclusive procedure to resolve the ownership disputes that turn on interpretation of or a declaration of the parties’ rights and obligations under a contract or instrument. The declaratory judgment act may also be proper for claims that involve the substantive construction of a contract or deed and a declaration of the parties’ rights and legal status under that contract or deed. VIII. TRY NOT TO REPRESENT CROOKS

Be careful who you represent. Certain clients may be a lawsuit in waiting. A. The Investment Advisor or Seller

Over the last 15 years, some of the largest legal malpractice claims in Texas have arisen out of the following scenario:

1) an investment advisor or seller comes up with an allegedly great investment vehicle;

2) the investment advisor/seller solicits customers to invest in his investment vehicles;

3) the investment advisor/seller takes in a lot of money from customers for his investment vehicle;

4) the investment advisor/seller hires a lawyer to set up investment vehicle and to provide the investment advisor with general legal representation;

5) it later turns out that the investment advisor was either running a full blown Ponzi scheme or was otherwise stealing money from the customer;

6) by the time the customers have realized that they have lost some or all of their


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money, the investment advisor is either in jail or has disappeared; and

7) this leads the customer to sue the lawyer contending that the lawyer actually represented the customers and had duties to the customers.

Also, as one of the customer’s claims against the lawyers, the customer often contends that the investment vehicle actually constituted a sale of an unregistered security. B. Oil and Gas Working Interests are Securities

Working interests in oil and gas leases are “securities” under the federal Securities Act of 1933 and under the Texas Securities Act. Tex. Civ. Stat. art. 581-1, et seq. “Texas courts have routinely held that the assignment of an interest in an oil and gas lease is a security for purposes of the State Securities Act.” Huett v. State, 1998 WL 297206, at p. 4 (Tex. App.—Dallas 1998, no pet.); accord Kadane v. Clark, 143 S.W.2d 197, 200 (Tex. 1940); Anderson v. Vinson Exploration, Inc., held that an oil and gas joint operating agreement was an investment contract, because the investors had a little experience and the operator “selected the specific oil and gas lease to purchase, negotiated the terms of the lease, performed a geological study of the property, selected the drill site, selected the formation to drill down to and oversaw the drilling and completion of the wells.” 832 S.W.2d 657, 662 (Tex. App.—El Paso 1992, writ denied). See also Calpetco 1981, Ltd. v. Marshall Exploration, Inc., 989 F.2d 1408, 1418-19 (5th Cir. 1987).

As a result, the offer and sale of these working interests must be registered under the 1933 Act and state securities law unless they fall within an exemption from registration. At the time of writing, this warning appears on the Attorney General of Texas’ website:

Here in Texas, especially in times when the price of oil is high, we receive many complaints about oil and gas investments. Investors have been ripped off by phony companies that promise huge profits due to the high cost of crude oil. . . . . . .The State Securities Board oversees oil and gas investments. Anyone considering an oil and gas investment should contact the Board for available information about the producer. The Board also accepts complaints about oil and gas investments. https://www.texasattorneygeneral.gov/consumer/investments.shtml

There is, however, an exemption in state law for for “oil, gas or mining leases” under the Texas Securities Act in article 581-5(Q) which reads:

Q. The sales of interests in and under oil, gas or mining leases, fees or titles, or contracts relating thereto, where (1) the total number of sales by any one owner of interests, whether whole, fractional, segregated or undivided in any single oil, gas or mineral lease, fee or title, or contract relating thereto, shall not exceed thirty-five (35) within a period of twelve (12) consecutive months and (2) no use is made of advertisement or public solicitation; provided, however, if such sale or sales are made by an agent for such owner or owners, such agent shall be licensed pursuant to this Act. No oil, gas or mineral unitization or pooling agreement shall be deemed a sale under this Act.

See Paull v. Capital Resource Management, Inc., 987 S.W.2d 214, 217-218 (Tex. App.—Austin 1999, pet denied) (examining oil and gas lease exemption for “total number of interests sold” and for “no use of advertisement or public solicitation” under Article 581-5(Q)).

The Texas Securities Act does not apply if the parties who invested are joint venturers. Brown v. Cole, 291 S.W.2d 704, 708 (Tex. 1956); Dunbar v. RKG Engineering, Inc., 746 S.W.2d 314, 315 (Tex.App.—Texarkana 1988, no writ). The elements of a joint venture are (1) a community of interest in the venture, (2) an agreement to share profits, (3) an agreement to share losses, and (4) mutual right of control or management of the enterprise. In re Great Western Drilling, LTD., 211 S.W.3d 828, 841 (Tex.App. –Eastland 2006, orig. proceeding).

The requirements of registration and exemptions are beyond the scope of this paper (and far beyond the expertise of the author), but this is an important concept and caveat for all oil and gas practitioners to know. Clients who offer working interests for sale should be counseled by attorneys who know the securities law field and can assure compliance with the law. If you do not know this area of the law, advise the client to retain an attorney who does. C. Know Your Client and the Transaction

If you are representing such an investment advisor or seller:

1) take some steps to check whether the investment advisor or seller is a crook;

2) in any interactions you may have with the customers or purchasers, make it clear (preferably in writing) that you only


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represent the investment advisor or seller and do not represent any of the customers or purchasers; and

3) do an analysis to see whether this investment vehicle can be construed to constitute the sale of unregistered securities.

IX. FIDUCIARY DUTY

As an attorney, you owe your client a fiduciary duty. This fiduciary duty is one of the highest duties found in the law.4

If a client sues a lawyer for breach of fiduciary duty the client can:

a) seek all damages proximately caused by the

lawyer’s breach of fiduciary duty; or

4 The relationship between attorney and client has been held to be highly fiduciary. See, e.g., Archer v. Griffith, 390 S.W.2d at 739 (Tex. 1964) (“The relation between an attorney and his client is highly fiduciary in nature, and their dealings with each other are subject to the same scrutiny, intendments and imputations as a transaction between an ordinary trustee and his cestui que trust. The burden of establishing its perfect fairness, adequacy, and equity is thrown upon the attorney….”) Id.; Keck, Mahin & Cate v. National Union Fire Ins. Co., 20 S.W.3d 692, 699 (Tex. 2000) (“Contracts between attorneys and their clients negotiated during the existence of the attorney-client relationship are closely scrutinized[, and b]ecause the relationship is fiduciary in nature, there is a presumption of unfairness or invalidity attached to such contracts.”); Perez v. Kirk & Carrigan, 822 S.W.2d 261, 265 (Tex. App. – Corpus Christi 1991, writ denied) (“[T[he relation between attorney and client is highly fiduciary in nature, and their dealings with each other are subject to the same scrutiny as a transaction between trustee and beneficiary.”); Wright v. Sydow, 173 S.W.3d 534, 548 (Tex. App. – Houston [14th Dist.] 2004, pet. denied) (“[C]ourts closely scrutinize contracts between attorneys and clients negotiated during the existence of the attorney-client relationship … because the relationship is fiduciary in nature and, therefore, courts presume those contracts are unfair or invalid.”). Jackson Law Office, P.C. v. Chappell, 37 S.W.3d at 22 (“[W]here self-dealing by the fiduciary is alleged, a ‘presumption of unfairness” automatically arises and the burden is placed on the fiduciary to prove (a) that the questioned transaction was made in good faith, (b) for a fair consideration, and (c) after full and complete disclosure of all material information to the principal.”); Kimleco Petroleum, Inc. v. Morrison & Shelton, 91 S.W.3d 921, 923 (Tex. App. – Fort Worth 2002, pet. denied) (“The focus of breach of fiduciary duty is whether an attorney obtained an improper benefit from representing a client … The essence of a breach of fiduciary duty involves the ‘integrity and fidelity’ of an attorney. … A breach of fiduciary duty occurs when an attorney benefits improperly from the attorney-client relationship by, among other things,

b) seek a forfeiture of some or all of the attorneys’ fees paid to the lawyer.

See Burrow v. Arce, 997 S.W.2d 229 (Tex. 1998).

In Arce, a Phillips 66 chemical plant explosion killed 23 people. Subsequently, five attorneys represented 126 plaintiffs on a contingent attorney fee basis against Phillips 66. The case was settled for $190 million. Out of this $190 million, the attorneys received $60 million.

Later, 49 of these plaintiffs sued the five attorneys contending the attorneys had breached their fiduciary duty to the clients by:

1) making an aggregate settlement of all the clients’ claims without the clients’ consent; and

2) failing to explain the settlements fully to the clients.

The attorneys filed a motion for summary judgment. The trial court granted the attorneys’ motion for summary judgment because there was no evidence that, but for the attorneys’ alleged breach of fiduciary duty, the clients would have received any more money.

The Texas Supreme Court reversed and remanded the case back to trial holding that if in fact the attorneys had committed a serious breach of their fiduciary duty to their clients, then the clients did not have to show actual damages. Instead, the clients could seek fee forfeiture of some or all of the attorney fee.

If a client sues an attorney for breach of fiduciary duty, the jury instruction that will be submitted at trial on breach of fiduciary duty will be very close to the following:

JURY QUESTION Did the defendant lawyer comply with his fiduciary duty to the client? As the client’s attorney, the attorney owed a fiduciary duty to the client. To prove the attorney complied with his duty, the attorney must show:

1) the transaction in question was fair and equitable to the client;

2) the attorney made reasonable use of the confidence that the client placed in the attorney;

3) the attorney acted in the utmost good faith and exercised the most scrupulous honesty toward the client;


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4) the attorney placed the interest of the client before the attorney’s own interest, did not use the advantage of the attorney’s position to gain any benefit for himself at the expense of the client, and did not place himself in any position where his self interest might conflict with his obligations as a fiduciary; and

5) the attorney fully and fairly disclosed all important information to the client concerning the transaction.

Answer: _____________ This jury instruction comes from the Texas Pattern Jury Charge.

X. CONFLICTS OF INTEREST

Be careful about potential conflicts of interest between you and your client. One recent study by a Texas legal malpractice insurance company reported that conflicts of interest played a part in 16% of their claims and 22% of their losses. In some situations, conflicts of interest can get juries mad and can lead to significant damages. XI. THE FILE BELONGS TO THE CLIENT

If your client sues you, the first thing the client will ask for is your file. As a general rule, the client is entitled to your entire original file. This includes any emails, work notes and bill drafts you still have. If a client asks for the file and the attorney is concerned that the client might bring a legal malpractice claim, the most self-protective course of action is (with client consent) to:

a) bates-stamp the file; b) keep a copy of that bates stamped file

(made at your own cost); and c) provide the original file to the client.

If the client does not want you to bates-stamp the original file, you should consider at least promptly bates-stamping your copy of the file. XII. TOP 10 DISCIPLINARY COMPLAINTS

Finally, the State Bar has identified the following as the top 10 sources of disciplinary complaints:

Representing both sides in a supposedly uncontested divorce:

a) Representing co-defendants in criminal cases;

b) Representing multiple heirs in an estate;

c) Not having a clear idea of whom your client is (e.g., the corporation or its officers, especially in non-litigation);

d) Representing an organization and its principals;

e) Providing free legal advice to charitable boards or organizations when your interests are involved;

f) Entering into a business relationship with a client;

g) Entering into a sexual relationship with a client;

h) Committing malpractice and not promptly telling your client; and

i) Once a conflict develops, not terminating an attorney-client relationship that was properly commenced.

Herring, Texas Legal Malpractice and Lawyer Discipline, p. 465, 5th Ed., 2006. . XIII. CONCLUSION

It is important that each of us review and update our knowledge of the Rules of Professional Conduct and the substantive areas of law in which we practice so that we may better serve our clients and our profession. This paper was prepared with those purposes in mind and to provide practice tips to assist the oil and gas lawyer, including the litigator. While not all of these “top 10” disciplinary complaint situations arise in oil and gas practice, many do. Be pro-active and prepared.

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