Face Challenges Confidently

160 Geodyne Energy Income Production Partnership I-E v. Newton Corporation

Tuesday, September 1st, 2015

Richard F. Brown

Geodyne Energy Income Production Partnership I-E v. The Newton Corp., 97 S.W.3d 779 (Tex. App.–Dallas 2003, no pet.), considers the liability of a nonoperator and the nonoperator’s assignee for a proportionate part of plugging and abandoning a well at a cost of $742,409.67. The well ceased production in paying quantities on December 10, 1996, and never again produced oil or gas in paying quantities. On December 10, 1996, Geodyne was a 10% working interest owner. On December 10, 1997, Geodyne sold its interest through a third-party auctioneer to Newton for $300.00. The sale documents provided that Geodyne made no representations or warranties regarding oil and gas production; marketable title; condition; quality; fitness for general or particular purpose; merchantability; accuracy of interest; or accuracy or completeness of any data; information or material supplied to Newton. Newton also agreed to take the conveyed property “as is.”
A nonoperator is liable for the plugging expenses if it owned the interest at the time the well was “required to be” or “should have been” plugged. The statutory scheme requires an operator to begin plugging operations on a dry or inactive well within one year after drilling or “operations” cease. Geodyne contended that various operations undertaken by the operator to restore operations after December 10, 1996, pushed the one-year window to some date after the transfer from Geodyne to Newton. The court rejected Geodyne’s argument and held that “operations” in this context meant producing oil or gas, not mechanical operations on the well itself. Therefore, a nonoperator is liable for its proportionate share of the plugging costs, if it owned the interest at the time the well ceased operation (production). Geodyne owned the nonoperating interest when operations ceased and for the one-year period during which the operator was required to begin plugging operations.
Newton also prevailed in the trial court on Newton’s contention that the sale was a violation of the Texas Securities Act (“TSA”). Newton complained of Geodyne’s failure to disclose that the lease had terminated. An interest in an oil and gas lease is a security. To recover under the TSA, a buyer must prove a security was sold by means of (1) an untrue statement of material fact or (2) an omission to state a material fact that is necessary in order to make the statements made in light of the circumstance under which they are made not misleading. An omission or misrepresentation is material “if there is a substantial likelihood that a reasonable investor would consider it important in deciding to invest.”
Geodyne relied upon the sales documents and the “as is” sale to avoid liability under the TSA. Geodyne first contended that the facts showed that Newton did not rely upon any misrepresentation or omission by Geodyne, but the court held that the TSA does not require the buyer to prove reliance. Geodyne next contended there was no causation because the sale was “as is,” and therefore no misrepresentation or omission by Geodyne caused Newton to purchase the security. The court held this was an unpermissible attempt to re-introduce reliance, which is not required under the TSA. Similarly, the TSA does not require a buyer to show causation as to damages. However, because Newton still owned the security, Newton’s only remedy was rescission.
Notwithstanding the terms of the auction, under the TSA, the buyer is not required to do any due diligence, and any waiver of compliance with the TSA is void. The buyer was only required to prove a misrepresentation or an omission by the seller. Geodyne represented it was selling a 10% interest in an oil and gas lease, when in fact the lease had terminated.