Originally published by Charles Sartain.
Let’s begin with a quiz. True or false:
- Apache Resources, LLC (n/k/a “Pueblo Resources, LLC.” Wonder why?) is Apache Corporation.
- Plains Natural Resources, LLC is Plains Exploration & Production Company.
- Ridge Natural Resources, LLC is Oak Ridge Natural Resources, LLC.
- Range Royalty, LLC is Range Resources Corporation.
If you answered “false” to all four, congratulations. In each category the latter companies are reputable independent oil and gas producers. The former are … well, let’s just call them “mineral buyers” (seemingly coordinated in their efforts in some murky way), one of which was the winner – for now – in Ridge Resources, LLC et al v. Double Eagle Royalty, LP
The “offer”
In 2016 Ridge contacted the McDaniels (Double Eagle’s predecessors) with an offer to “lease” their mineral interests in Winkler County. The McDaniels informed Ridge about a producing lease from 2004, and were assured that it wouldn’t be a problem. Ridge sent a letter and lease form that, in the limited experience of these unsophisticated mineral owners, looked pretty much like a standard oil and gas lease.
The charade
The McDaniels executed a “Royalty Lease” that was, in reality, a conveyance of a non-participating royalty interest to Ridge for a term extending as long as the 2004 lease was held by production. The McDaniels had just traded away three quarters of their future royalty payments for a one-time cash bonus payment. Double Eagle—McDaniels’ successor-in-interest—sued Ridge for fraud (among other claims). Before reaching the substantive issues, the court wrestled with a pesky arbitration clause, which oil and gas expert and law professor Terry Cross called “highly unusual for an oil and gas lease covering Texas land.”
Double Eagle attacked the arbitration clause on numerous grounds. Ultimately, the court enforced the provision except for its prohibition on exemplary damages. Unfortunately for Double Eagle, there were several procedural issues with its arguments, but fortunately for similarly positioned plaintiffs, the court provided what is essentially a blueprint for successfully challenging Ridge’s dastardly arbitration clause. (The dissent didn’t need the blueprint. It would have sent the case straight to the courthouse)
The unanswered question
When (we ask rhetorically) does a transaction cross the line from “sharp” to “stealing”? We understand the sellers’ duty to read and understand instruments they sign. But, here is …
The takeaway
One reason to invoke arbitration is so that conflicts are resolved by experts in the industry. Another reason is to hide one’s misdeeds from the public scrutiny that comes only from the courthouse. There, commercial predators will find it more difficult to avoid the harsh judgment of 12 strangers who might not be experts but who can discern “sharp” from “stealing”.
Ridge may have won a Pyrrhic victory if plaintiffs across Texas follow the court of appeals’ roadmap for overcoming an arbitration clause. We expect there will be plenty involving our true-false test subjects.
Is this an epidemic?
Decide for yourself. Here is a report from TexasFile.com on Ridge’s transactions alone. We count about 100. Check out the others at your leisure.
Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.
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