Texas Supreme Court’s Oil and Gas Decision Has Implications Beyond Oil and Gas Law: How to Structure Your Releases in Settlement Agreements
By: Matthew W. Onest, Esq.
Less than a month ago the Texas Supreme Court issued a decision in Finley Resources, Inc., et al. v. Headington Royalty, Inc., et al., Texas Supreme Court Case No. 21-0509, which on first blush may seem to be confined to disputes between putative owners of oil and gas leases. That said, the ruling affects anyone who gets involved in a settlement agreement. It goes to the heart of the key component for an attorney’s drafting of a release provision within a settlement agreement.
Finley Resources, Inc. and Finley Production Co., L.P. owned the shallow rights for an oil and gas lease and shallow wells for lands in Loving County, Texas. Headington Royalty, Inc. and Headington Energy Partners, LLC owned the deep rights for that lease. Headington’s deep rights were held by Finley’s operations of the shallow wells—the shallow production held the lease (shallow and deep). This is a common occurrence in Ohio’s Utica shale play, where deep rights under older leases are severed and assigned off to another party and that party holds the deep rights so long as the shallow wells holding the lease continue to produce enough.
Headington became concerned that Finley hadn’t been operating the shallow wells to produce enough and sent a demand letter to Finley requesting information on the wells’ production, revenue, and expenses. At around that same time Finley had been talking with Petro Canyon about assigning its shallow rights in the lease. Eventually, Finley assigned its right to the lease and wells to Petro Canyon. Petro Canyon had also taken a top lease on the lands at issue (a top lease being an oil and gas lease on lands with an existing lease and the top lease becomes effective when the existing lease goes away). Headington learned about the top lease and began negotiating with Petro Canyon about acquiring the top lease. Headington and Petro Canyon eventually closed that deal, swapped certain rights, and entered into a mutual release agreement. Headington released “Petro Canyon and its affiliates and their respective…predecessors…for any liabilities, claims, demands, causes of action or obligations…related in any way to the Loving County Tract[.]” The Loving County Tract is the real estate covered by the original lease and top lease. Finley was not named within the release provision or within the swap-agreement between Headington and Petro Canyon. Headington turned around and sued Finley seeking damages relating to Finley’s failure to adequately produce the shallow wells. Headington claimed it wouldn’t have needed to negotiate with Petro Canyon if Finley had properly produced the shallow wells and kept Headington updated on the wells’ status.
Finley claimed it wasn’t liable to Headington, in part, because Finley was a predecessor to Petro Canyon and so fell under the term “predecessor” within the release agreement between Headington and Petro Canyon.
The Texas Supreme Court sided with Headington and held that “predecessor” referred to corporate predecessors and not predecessors in title for the oil and gas lease and property at issue. The Court held that “predecessor” used in this specific release agreement was tied to the parties to the agreement (Headington and Petro Canyon) and not the real estate at issue. The Court said that the parties could have included predecessors in title like Finley if they had tied predecessors to the property or subject matter of the release agreement. But because the parties used the predecessors solely on relation to the parties to the agreement that meant they intended to include only corporate predecessors (such as companies which merged with the two companies). Because Finley was only a predecessor in title for the oil and gas lease it couldn’t benefit from the release agreement.
This decision is a good reminder to make sure to clearer draft release clauses to make sure they cover what you intend to cover. When dealing with titled assets, like real estate and oil and gas leases, it is important to make sure that predecessors are tied not only to the parties, but also the assets. It reminds drafters to focus on the two important aspects of any mutual release: the parties and the subject matter. Perhaps if the parties had said predecessors relating to the parties and relating to the subject matter of the agreement (the original lease, the top lease, or the leasehold acreage) then Finley would have been covered by the release. It all comes down to proper drafting to accomplish your intent, whether that be restricting the scope of the release to less parties or expanding to include more parties. That strategic decision must be discussed early in the settlement process to make sure the release accomplishes your goals.