243 Endeavor Natural Gas, L.P. v. Magnum Hunter Prod., Inc.

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
Endeavor Natural Gas, L.P. v. Magnum Hunter Production, Inc. No. 13-06-352-CV, 2007 WL 4340870 (Tex. App.—Corpus Christi, December 13, 2007 no pet.), construes an assignment and holds that severance tax refunds and credits are payable to Assignor as “amounts realized from and accruing to Subject Wells prior to the effective date” under the terms of the assignment. The key language in the assignment provided that Assignor was entitled to “amounts realized from and accruing to the Subject Wells” before the effective date of December 1, 2002, and that Assignee was entitled to “amounts realized from and accruing to the Subject Wells” after the effective date.  A subsequent letter agreement provided:
 
[A]ll post-closing adjustments related to the sale by [Assignor] of the subject properties to [Assignee] will be made on or before June 1, 2003, and thereafter all expenses and revenue attributable to operations on and production from the subject Wells before or after December 1, 2002, if any will be the responsibility of and inure to the benefit of [Assignee].
 
Assignee contended that the letter agreement and the assignment should be construed together as a single agreement, that the subsequent, more specific letter agreement should control over the assignment, that taxes are considered expenses under Texas law, and therefore the tax refunds and credits belong to Assignee. The court agreed that under generally accepted principles of contract interpretation, the letter agreement and the assignment should be considered together to determine the intent of the parties, because they both pertained to the same transaction:  the assignment of the wells from Assignor to Assignee.
 
The $766,472 in severance tax refunds and credits corresponded to Assignor’s overpayment of severance taxes for minerals produced prior to December 1, 2002. Severance tax is a tax on natural gas or oil which is payable by the producer. Assignee contended that taxes are expenses, and under the letter agreement, “expenses and revenue,” whether attributable to production before or after the effective date, inure to the benefit of Assignee.
 
The court concluded that the terms used in the letter agreement should be given their plain, ordinary, and generally accepted meaning and refused to read the terms as having some technical or different sense. Citing to definitions from Black’s Law Dictionary, the court concluded that refunds could not constitute “expenses,” because they were monies received rather than expended. The refunds could not constitute “revenues,” because they were not payment for goods, services, or investments.
 
The court also cited to numerous tax cases for the general principle that tax refunds are not income, but a return of capital funds to the rightful owner. Because the tax refunds were neither expenses nor revenue, the court concluded that the broader language in the assignment controlled,  and  that  the  severance  tax  refunds  and  credits  are  “amounts  realized  from  and accruing to subject wells prior to the effective date” as provided in the assignment.
 
The significance of the case is that the language used in the assignment, which is fairly typical of most assignments and purchase and sale agreements, will allocate severance tax refunds based on the effective date. The case adopts definitions out of Black’s Law Dictionary and applies the definitions for expense, revenue, and gross receipts to this common oil and gas transaction. The letter agreement transferring to Assignee all “expenses and revenue,” both before and after the effective date, is not common, but the concept is sometimes found in agreements as to matters arising after the final accounting date, or after some arbitrary fixed date after closing.