Face Challenges Confidently

090 Transamerican Natural Gas Corp. v. Finkelstein

Tuesday, September 1st, 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.
Transamerican Natural Gas Corp. v. Finkelstein 933 S.W.2d 591, 1996 WL 40010 (Tex. A.P.—San Antonio, August 14, 1996,      ) addressed the right of an overriding royalty owner to share in repudiation damages for repudiation of a take-or-pay gas contract as to that portion of the gas actually produced and sold in the spot market. El Paso entered into a long term take-or-pay contract with Transamerican’s predecessor which included gas subject to an overriding royalty payable to Finkelstein. El Paso’s attempts to avoid the take-or-pay contract resulted in litigation and a judgment against El Paso in favor of Transamerican for take-or-pay damages in excess of sixty million dollars and repudiation damages in excess of four hundred million dollars. The jury findings on damages corresponded exactly to Transamerican’s experts’ testimony as to the present value of the difference between El Paso’s required price under the contract and the spot market price for the gas. El Paso settled the case by conveying the lands to Transamerican. When Transamerican refused to pay Finkelstein any part of the settlement, Finkelstein sued.
Because prior cases made it clear that as a royalty owner Finkelstein had no hope of sharing in settlement proceeds attributable to take-or-pay “settlement” payments, Finkelstein sought to recover a share of the repudiation damages allocable to the overriding royalty on gas already produced and attributable to his interest prior to the conveyance.
The court concluded that Finkelstein’s overriding royalty, like a lessor’s royalty, was payable only on gas actually produced. Awards as damages for nonpayment of take-or-pay payments or for repudiation both represent payments for nonproduction. The non-recoupable take-or-pay payment is not compensation for past and/or future gas production, but represents compensation for the exclusive dedication of reserves for a fixed period of time. Take-or-pay is not a benefit which flows from the marketing covenant of the lease, which only requires that Finkelstein be paid for the gas produced and sold on the spot market.