559 Plains Expl. & Prod. Co. v. Torch Energy Advisors Inc., 473 S.W.3d 296 (Tex. 2015)

Friday, June 16th, 2017

Richard F. Brown

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

Plains Expl. & Prod. Co. v. Torch Energy Advisors Inc., 473 S.W.3d 296 (Tex. 2015) (Excluded Assets clause in PSA) construes the Excluded Assets clause in a typical Purchase and Sale Agreement. Prior to 1990, there was a regulatory scheme in place governing offshore leasing. In 1990, that scheme was amended. In 1994, Torch Energy Advisors Incorporated (“Torch”) obtained interests in various undeveloped leases on the Pacific outer continental shelf (“OCS leases”). In 1996, pursuant to a Purchase and Sale Agreement (“PSA”), Torch conveyed its interests in the OCS leases into the chain of title of Plains Exploration & Production Company (“Plains”) subject to the Excluded Assets clause in the 1996 PSA. In 2001, California successfully sued the federal government for matters affecting the OCS leases resulting in a different construction of the 1990 statutory amendment than the one anticipated by the leasing parties. This and other litigation effectively made development of the OCS leases impossible. In 2005, Plains obtained a judgment that governmental repudiation occurred in 2001, and as a result of the lawsuit, Plains was awarded restitution damages measured by the original lease bonus payments of approximately $83 million. Torch sued Plains on breach of contract under the Excluded Assets clause in the 1996 PSA and various other theories for its part of the restitution damages.

The specific PSA language at issue read as follows:

1.2. Excluded Assets. As used herein, “Excluded Assets” means . . . (b) all claims and causes of action of [Torch] (i) arising from acts, omissions or events, or damage to or destruction of property, occurring prior to the Effective Date, (ii) arising under or with respect to any of the Contracts that are attributable to periods of time prior to the Effective Date (including claims for adjustments or refunds); . . . (g) all proceeds, income or revenues (and any security or other deposits made) attributable to (i) the Properties for any period prior to the Effective Date, or (ii) any Excluded Assets. . . .

The PSA specifically reserved some inconsequential items, but made no reference to bonus, and Torch represented in the PSA that there were no pending claims. The Court described the 2005 judgment as the asset at issue and was heavily influenced by the provisions relating to the Effective Date.

The Court applied a plain meaning analysis to the operative words, “arising from,” “arising under or with respect to,” and “attributable to.” The Court concluded these terms unambiguously require a pre-effective date causal nexus that does not exist in this case. Torch argued for a “but for” connection. “But for” the payment of bonus (before the Effective Date) there would be no leases and thus no judgment. Adopting that argument “would render the temporal division employed in the relevant exclusions utterly meaningless.” The Federal Circuit court had held that enactment of the amendment in 1990 did not breach or repudiate the OCS leases; it was events and actions taken in 2001 and later. Moreover, lease bonus was only used as a measure of damages in the 2005 judgment. “Because the proceeds of the . . . judgment are neither attributable to or arising from or with respect to pre-conveyance events, they are not excluded assets. . . .”

The form of the PSA and the Excluded Assets provision appear to be fairly typical, and thus the significance of the case seems to be that in the absence of specifically identified claims or assets, the Effective Date will have a great impact on determining what is or is not conveyed or excluded.