353 Parker v. MSB Energy, Inc. (In re MSB Energy, Inc.)

Wednesday, September 2nd, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

Parker v. MSB Energy, Inc. (In re  MSB  Energy,  Inc.),  438  B.R.  571  (Bankr.  S.D. Tex. 2010), held that because there was no “available pipeline” for the lessee to transport gas from its well, the lessee could tender shut-in royalty payments to perpetuate the lessee’s leases. During the primary term of two leases, actual production was obtained, and MSB, as lessee, began paying production royalties from the only lease well. Thereafter, the pipeline’s operator refused to accept MSB’s gas causing the well to be shut-in for more than 90 consecutive days.

Before  the expiration of this 90-day period, MSB mailed shut-in royalty payments by certified mail to the lessors utilizing the United State Postal Service (“USPS”). One lessor picked up his check before the end of the 90-day period, but the other lessor picked up his check 110 days after the well was shut in.  Both lessors sued MSB asserting that their leases had terminated.

The habendum clause in the leases provided that the leases would be in effect for “eighteen (18) months . . . and so long thereafter as oil and gas, or either of them, is produced in paying quantities from the leased premises . . . .” Production from the well perpetuated the leases beyond their primary terms. However, production ceased when the pipeline’s operator refused to accept MSB’s gas. The lessors argued that there was a total cessation of production, and, therefore, the leases terminated. Alternatively, the lessors argued that the leases terminated because MSB failed to timely tender their shut-in royalty payments.

Pursuant to the lease provisions, shut-in royalty payments could be made when a well was shut-in for specific conditions, including the lack of an available pipeline. The shut-in royalty provision in the leases provided:

While there is a well on the leased premises or lands pooled therewith capable of producing gas in paying quantities but the production thereof is shut-down or suspended for lack of a market, [or] available pipeline . . . in any such event, Lessee may pay as shut-in royalty on or before ninety (90) days after the date on which (1) production from any such well is shut-in . . . or (2) this Lease is no longer maintained by compliance with one of the other preservation provisions hereof, whichever is the later date, and thereafter at annual intervals the sum of Fifty Dollars ($50.00) per net mineral acre per proration unit per well . . . . If such payment is made in accordance with the terms hereof, this lease shall not terminate, but shall continue in force for a period of one (1) year from the date of making such shut-in payments . . . .

The lessors argued that the pipeline was “available,” defining available as “suitable or ready for use; of use or service; at hand; readily obtainable; accessible; having sufficient power or efficiency; [or] valid.” MSB argued that the pipeline was not available because the pipeline’s operator refused to accept MSB’s gas.  The court agreed with MSB concluding that even if the lessors’ definition of available is used to interpret the lease, when a pipeline operator refuses to transport gas, the pipeline itself is not available; the pipeline is not ready for use. “Because there was no ‘available pipeline’ for MSB to transport gas from the Well, MSB could tender shut-in royalty payments to prevent the Leases from terminating.”

The leases in this case do not specify the manner in which the shut-in royalty payments should be paid or received.

Where the payment or offer of money is made a condition of obligor’s duty, payment or offer of payment in any manner current in the ordinary course of business satisfies the requirement unless the obligee demands payment in legal tender and gives any extension of time reasonably necessary to procure it.

Production royalty checks attributable to the sale of gas from the well and shut-in royalty checks were sent to the lessors via USPS. The production royalty checks established a “manner [of payment] current in the ordinary course of business,” and the shut-in royalty payments were subsequently tendered in the same manner. Accordingly, the shut-in royalty payments were tendered consistently with the “manner current in the ordinary course of business,” and this type of tender is “consistent with the standard method of tendering obligations due under oil and gas leases generally.” “MSB tendered shut-in royalty payments to the [Lessors] in accordance with the Leases’ requirements.”

After shutting-in the Well, lessee had 90 days to pay shut-in royalties to perpetuate the leases under the shut-in royalty clause. “Three days before the shut-in royalties were due, the USPS gave the Plaintiffs [lessors] notice that their respective letters were being held for pick-up.” Although one of the lessors did not pick up the check during the 90-day window, the payment was timely made three days before shut-in royalty payments were due. The court did not address whether using the mail or certified mail made any difference, nor did it comment upon the fact that although the production checks were sent by regular mail, the shut-in royalty checks were sent by certified mail.

The significance of this case is that, under a fairly common shut-in royalty provision, when a pipeline operator refuses to transport gas, shut-in royalty payments can perpetuate a lease. However, there are many variants to shut-in royalty clauses, and perhaps the most common, unlike the clause in this case, does not expressly mention lack of a pipeline as a trigger for the clause to apply.