Face Challenges Confidently

293 Exxon Corp. v. Emerald Oil Gas Co.

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.
Exxon Corp. v. Emerald Oil & Gas Co. held that false filings with the Texas Railroad Commission (“TRC”) will generally not support private causes of action for fraud. This case is the culmination of almost fifteen years of litigation between royalty owners and their lessee, based on disputes arising under leases granted in the 1950s. The leases covered several thousand acres and included a 50% royalty clause and a stringent disclosure clause.  The leases also required the lessee and successor lessees (collectively “Exxon”) to fully develop the field by drilling and completing in each horizon at least one well capable of producing in paying quantities and to operate the tract in order to realize the full value of the leased premises. During the term of the leases, Exxon drilled 121 wells and produced at least 15 million barrels of oil and more than 65 billion cubic feet of gas, resulting in the payment of more than $43 million in royalties.  As the field began to decline, Exxon sought to amend the leases and reduce the royalty.  The royalty owners refused, and negotiations continued for years, increasing in intensity as Exxon’s threat to plug and abandon became more imminent. The royalty owners identified other oil companies interested in taking over the leases.  The royalty owners urged Exxon to sell or transfer its interest to some other company.
Because Exxon determined that the leases were no longer profitable, Exxon finally began plugging wells in 1989.  The royalty owners threatened to sue Exxon in August of 1990 should Exxon plug any wells that were capable of producing in paying quantities as to the interest of the royalty owners.  The royalty owners threatened to sue under the leases and common law and to sue for waste. As Exxon plugged the wells, it disclosed the plugging methods for each well in a plugging report on Form W-3 filed with the TRC. The filing requires that the operator disclose the specific methods used to plug the wells and sign an oath verifying that the statements in the report are true.  Exxon pursued the plugging project until its completion in 1991, despite objections from the royalty owners and offers from potential buyers.
In 1993, after the leases had terminated, the royalty owners leased part of the lands originally included in Exxon’s leases to Pace West Production, Ltd. (“Pace”), later known as Emerald Oil & Gas Company, L.C. (“Emerald”).  In deciding whether to lease, Emerald reviewed Exxon’s publicly filed plugging reports.  The filings seemed to indicate Exxon properly plugged the wells, and Emerald attempted to reopen the plugged wells in 1994.  Emerald’s attempts proved futile because Emerald encountered junk in the hole.  In a 1994 written report to the royalty owners, Emerald indicated that Exxon had cut casings while plugging the wells and that Emerald found junk in the wells.  In January 1995, Emerald obtained Exxon’s internal well records on the plugged wells from another party on an adjoining tract and discovered that Exxon’s internal records differed substantially from the records filed with the TRC. Concluding that Exxon intentionally sabotaged the field, Emerald sued Exxon in July 1996, and the royalty owners intervened in August and September of 1996.
The trial court severed plaintiffs’ negligence per se claim and claims based on the statutory duties to properly plug the wells and to avoid committing waste on the issue of whether the statutes created private causes of action.  The statutory claims and the issues on private causes of action and standing were resolved in the companion case also styled Exxon Corp. v. Emerald Oil & Gas Co.

All of the tort claims asserted and appealed in this case that were subject to a two-year statute of limitations were held to be barred by limitations. The remainder of the opinion focused on the alleged fraud based on the Form W-3’s filed with the TRC and the royalty owners’ claim of breach of the lease based on the development clause in the leases.
Regarding plaintiffs’ claim of fraud based on the Form W-3’s filed with the TRC, Exxon did not dispute that it plugged at least some of the wells using non-standard plugging procedures. It admitted to cutting the well casing and leaving it in the wellbore. Emerald and the royalty owners claimed that Exxon injured them by making material misrepresentations on its plugging reports, which the plaintiffs justifiably relied upon.  However, to prevail on its claim of fraud, the plaintiffs also had to demonstrate that Exxon “made the representation with the intent that the other party would act on that representation or intended to induce the party’s reliance on the representation.”
The TRC rules provide that “[n]on-drillable material that would hamper or prevent re- entry of a well shall not be placed in any wellbore during plugging operations . . . .  Pipe and unretrievable junk shall not be cemented in the hole during plugging operations without prior approval by the district director. . . .” Exxon obviously did not comply with this rule.  Exxon nevertheless claimed that it could not have anticipated that the plugging reports it filed would impact future operators, because the reporting requirements are intended to protect against pollution and are not intended to provide notice to future operators. The court rejected Exxon’s argument based on the TRC’s objectives for the reporting requirements: (1) protect the environment and (2) allow “re-entry into the wells for commercial purposes.”
Although the court accepted Emerald’s argument that false information in the plugging records could reasonably induce detrimental reliance, the court stated that this alone did not establish that Exxon intended to induce the plaintiffs’ reliance. Rather, the plaintiffs must show that “[t]he maker of the misrepresentation [has] information that would lead a reasonable man to conclude that there is an especial likelihood that it will reach those persons and will influence their conduct.” This is a specific, focused inquiry.  Relying upon public information as part of a general industry practice, which information turns out to be false, is, as a matter of law, insufficient.  The inquiry is “not satisfied by evidence that a misrepresentation may be read in the future by some unknown member of the public or of a specific industry.” The court found there was some evidence that could support a finding of fraud:  Pace’s earlier attempts to acquire the wells and Emerald and the royalty owners’ attempts to stop Exxon’s plugging.  There were fact issues on the intent question: whether Pace and Emerald were effectively the same entity and whether the W-3s were actually inaccurate.  Therefore, the trial court’s directed verdict for Exxon on fraud was reversed and the case was remanded to the trial court on that issue.
The leases with Exxon contained a development clause requiring Exxon to fully develop the leased tracts.  The tracts were deemed “fully developed” when “at least one (1) well has been drilled and completed in each horizon or stratum capable of producing oil or sulphur in paying quantities for each twenty (20) acres of said tract.” As required by the lease, Exxon generally drilled the required number of wells.  However, the royalty owners claimed that Exxon did not “complete” two productive zones because it failed to exploit the full potential of the tracts. Also the royalty owners claimed that because Article 4 of the leases required Exxon to realize the “full value” of the tract, Exxon was required to drill more than the single well specified for each horizon when the land could be further developed, before Exxon could abandon the leases.
Because Article 3 specified the number of wells required to fully develop the land, the court held that Article 3 established and limited Exxon’s duty. “Where the Lease expressly defines the duty, we will not impose a more stringent obligation unless it is clear that the parties intended to warrant production beyond that defined obligation.” The court held that under this particular lease (with its express development clause) and in the absence of an express clause defining “drilled and completed,” for a well to be drilled and completed, “a hole must be bored in the ground, and if oil or gas in paying quantities is encountered, the casing must be perforated or otherwise prepared for production.” The court also noted that “completed” means capable of producing oil or gas, without a requirement that it be actually producing or ever produce, and by contract, parties may agree that a well is completed even though it is a dry hole.  Because Exxon drilled the required number of wells and produced in paying quantities from the two contested zones, the court held that Exxon did not breach the leases, even though Exxon did not fully exploit the zones’ potential. Exxon was not liable for breach of the development clause of the leases.
The significance of the case is the holding that false filings with the TRC will not support private causes of action based on fraud, except in very narrow circumstances. A plaintiff must show that the party making the false filing has information that would lead a reasonable man to conclude that there is an especial likelihood that it will reach those persons and will influence their conduct. The fact that the information may influence some unknown person or the fact that the industry generally relies upon such filings is not enough.  The case also provides a definition of “drill and complete,” which at least under this lease is construed to mean to drill and perforate the hole or otherwise prepare for production.  The contention that “complete” used in this context means to fully develop was rejected.  Finally, the plaintiffs’ loss on all the two-year tort claims based on limitations suggests that landowners should be more aggressive about filing suit or seeking tolling agreements, regardless of the status of on-going lease negotiations.