The Texas Supreme Court has agreed to review a Beaumont Court of Appeals decision upholding a $13.1 million judgment in favor of lessors of oil-and-gas leases in Hardin and Jefferson Counties.

Samson Exploration, LLC v. Joe A. Bordages Jr., et al. (No. 22-0215; 09-20-00174-CV; delivered January 23, 2022) arose from a dispute between several mineral lessors and their lessee Samson. The leases were executed in 1999, and in 2001 Samson requested a title opinion covering 95 acres in Hardin County. In December 2001, a third-party attorney issued the opinion, which determined that between 1938 and 1943, Hooks and other owners conveyed an undivided 1/3 interest in the property to Bordages. The deed was never recorded in Hardin County. It also flagged an issue of whether a trust for the benefit of a Bordages family member still existed. The attorney requested Samson to ask Bordages for the missing deed and information confirming the termination of the trust. Samson requested the information by letter dated May 14, 2002, and four days later Bordages responded that the trust had terminated. Regarding the missing deed, Samson learned from yet another attorney who advised that while no deed existed, a Certificate of Interest vesting Bordages with a 1/3 interest did. Samson re-sent the May 14 letter but received no response. It thus suspended royalty payments to Bordages until October 27, when the Hooks family provided an affidavit confirming transfer and attached the Certificate of Interest. Samson resumed royalty payments in December 2007.

In 2005 and 2006, the Bordages landowners joined an ongoing lawsuit arising from the dispute for breaches of the lease agreements, failure to pay royalties, statutory violation, negligence, fraud, unpaid late charges, and attorney’s fees. The procedural history of this litigation is complex and extended, but suffice it to say that the present lawsuit was severed from two others involving similar issues but different landowners. These parallel suits both ended up before SCOTX, and now this one has well.  The court of appeals’ opinion recounts at some length the impressive motion practice in the case, but for our purposes we will boil things down to the trial court’s rulings. The trial court granted Bordages’ motions for partial summary judgment on three claims: accrued unpaid royalties, violations of the leases’ “motion favored nation” clause, and liability for ad valorem taxes. The final judgment awarded Bordages total damages of $12,955,919, including $8,312,203 for accrued and unpaid royalties and $4,643,716 for most favored nations damages. In addition, the judgment awarded $97,421.25 in attorney’s fees through judgment and $135,000 in appellate attorney’s fees.

Samson’s petition for review focuses on the court of appeals’ construction of the lease language requiring Samson to pay late charges “computed for each month of past due royalties, based on the amount due each month, including any previously accrued Late Charges, calculated at eighteen percent (18%) per annum.” That language provides that late charges shall be calculated “commencing on the day after the last day on which such monthly royalty payment could have been timely made and for every calendar month and/or fraction thereof from the due date until paid, plus attorney’s fees, court costs, and other costs in connection with the collection of the unpaid amount. The lease provides further that “[a]ny Late Charge that may become applicable shall be due and payable on the last day of each month when this provision becomes applicable.”

Construing the lease according to its “plain meaning,” the court of appeals concluded that when the language specifying when a late charge commences and when it becomes due and payable is read together, “the lease’s operative language authorized ‘late charges on late charges’ and did not limit a late charge to past due royalties.”  Turning to the question of whether those charges should be calculated on a simple (as Samson argued) or compound (as Bordages argued) basis, the court of appeals held that since the leases specified that late charges were due on a monthly basis, that is, “each month,” the late charges “became part of the ‘amount due.’” Here the court followed a Houston court of appeals opinion, Texon Energy Corp. v. Dow Chemical Co., 733 S.W.2d 328, 331 (Tex. App.—Houston [14th Dist.] 1987, writ ref’d n.r.e.), which held that “the word ‘monthly’ was used to establish the periodic ‘rest’ upon which compound interest could be calculated.” Consequently, contrary to Samson’s argument, the lease did not need to explicitly state that late charges be calculated on a compound basis.

Samson’s petition argues that the court of appeals’ construction of the lease runs afoul of “sound judicial philosophy, sound commercial sense, and [SCOTX’s] judicial canons of contract interpretation…” Specifically, Samson’s objections include: (1) that the 18% late charges include late charges and not just “past due royalties”; (2) that compound interest, which the law disfavors as unjust, must be “the subject of an express agreement by the parties” and “not inferred obliquely”; (3) that compounding “violated this Court’s enjoinder to construe contracts from a utilitarian standpoint—i.e., to promote the purpose of the contract (here to explore successfully for minerals),” producing a judgment “with an inference of a legally disfavored compounding mechanism that now comprises nearly 84% of the judgment”; and (4) that the court of appeals’ reading of the term “amount due” constitutes “an egregious grammatical error because the theory of compound interest is that past due interest is merged into principal.”

Judging from the heavyweight appellate counsel engaged on both sides, this case will likely draw significant interest from across the industry. SCOTX scheduled oral argument for October 26.

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