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How Safe is Your Harbor? Suspense of Production Payments in the Wake of 1776 Energy Partners, LLC v. Freeport-McMoran Oil & Gas LLC

May 4, 2022 In 1776 Energy Partners, LLC v. Freeport-McMoran Oil & Gas LLC, the Court of Appeals of San Antonio examined whether production payments under various joint operating agreements were properly held in suspense without interest under the “safe harbor” provisions of Texas Natural Resources Code Section 91.402(b) (a/k/a the “Texas Suspense Statute”).[1]  Specifically, it examined whether creation of a constructive trust pursuant to a judgment amounted to “a dispute concerning title that would affect distribution of payments” pursuant to Section 91.402(b)(1)(A).  For the reasons discussed below, the Court found that as a matter of law, creating a constructive trust pursuant to a judgment did not create a suspense-worthy title dispute affecting distribution of payments under the joint operating agreements.  Consequently, the operators were not entitled to withhold payments on production without accruing interest.  This decision reversed the trial court’s grant of summary judgement and remanded the case back to the trial court for further proceedings regarding fact issues.

Between the years of November 2011 through March 2012, Appellant 1776 Energy Partners, LLC (“1776”) and Appellees Freeport-McMoran Oil & Gas, LLC and Encana Oil & Gas (USA), Inc. (“Freeport” and “Encana”) entered into five joint operating agreements for the development of their oil and gas leases.  Freeport and Encana were designated as operators of the contract areas.  1776 participated as a non-operator and was entitled to its proportionate share of the net proceeds from the production of oil and gas.[2]

In 2011, 1776 was sued by Longview Energy Company (“Longview”) for breach of fiduciary duty.  Longview prevailed at the trial court level, and was granted a constructive trust over their “equitable interest” in 1776’s rights to receive payments on production under the joint operating agreements.[3]  1776 was ordered to assign the interests to Longview within thirty days of the judgement, but until said assignment was executed, 1776 was to retain the legal title to the assets as constructive trustee for Longview’s use and benefit, retaining no equitable interest.[4]  1776 appealed the judgement, and posted bond to delay the enforcement of the order until the case had gone through appeal.  As a result, no assignment from 1776 into Longview was ever executed.  The case ultimately made its way to the Texas Supreme Court, where judgment was rendered in favor of 1776 in December of 2017.[5]

While the case was on appeal, Freeport and Encana placed 1776’s production payments in suspense.[6]  1776 filed suit claiming that Freeport and Encana wrongly withheld the payments on production, and that 1776 was entitled to statutory interest on the withheld payments.[7]  Freeport and Encana moved for summary judgement arguing that they were, as a matter of law, entitled to place the payments in suspense without accruing interest pursuant to the safe harbor provisions of the Texas Natural Resources Code Section 91.402(b) because the judgement against 1776 created a title dispute.[8]  The trial court agreed, granting their motion for summary judgement and dismissing 1776’s claims with prejudice.  1776 appealed, and the case was heard in the 4th District Court of Appeals, San Antonio.

For the Appellate Court, the issue hinged on the specific language of the safe harbor provision and whether the facts of this case amounted to “a dispute concerning title that would affect distribution of payments.”  Specifically, Section 91.402(b)(1)(A) states that payments may be withheld without interest beyond the time limits set out in subsection 91.402(a) if there is “a dispute concerning title that would affect distribution of payments.”[9]  Ultimately, the Court determined that the judgement did not create a dispute concerning title that would affect the distribution of payments as set forth under the joint operating agreement.  The Court reasoned that with or without the judgement, payments would still be owed to 1776, either in their own right as the owner of “legal title,” or as constructive trustee for Longview’s “use and benefit” until title was assigned to them under the judgement.[10]  Because the assignment never occurred, legal title always remained in 1776[11].

The Court also applied Section 91.402(b)(1)(B)(ii) of the Suspense Statute which states that payments may be withheld without interest beyond the time limits set out in Section 91.402(a) if there is “a reasonable doubt that the payee has clear title to the interest in the proceeds of production.”[12]  On this issue, the Court determined that there was a genuine issue of material fact as to whether Freeport and Encana’s doubts about 1776’s title being clear were reasonable, and remanded the case to the trial court for further findings.[13]

This case reminds us that the courts rely on a strict interpretation of statutory language, and that specifically, not every title “dispute” is enough to invoke the “safe harbor” provision of the Texas Suspense Statute.  For safe harbor protection, the title dispute must rise to the level that it affects the distribution of payments, and that in this case, a constructive trust created pursuant to a judgment does not meet the standard.

 

CONTACT

If you have any questions regarding this case law update or suggestions for topics to be covered in future issues, please call our office at 713-229-0360 or contact the authors:

Emily Sheffield

Senior Attorney, Houston

[email protected]

Brad Gibbs

Partner, Houston

[email protected]

 

 

 

 

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[1] 1776 Energy Partners, LLC v. Freeport-McMoran Oil & Gas LLC, No. 04-20-00468-CV, 2021 Tex. App. LEXIS 10157 (Tex. App. Dec. 29, 2021)

[2] Id. at 2.

[3] Id. at 2-3.

[4] Id. at 3.

[5] Id. at 4.

[6] Id.

[7] Id.

[8] Id.

[9] Id. at 5-6.

[10] Id. at 7-8.

[11] Id. at 8-9.

[12] Id. at 6.

[13] Id. at 10-11.

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