SCOTX has agreed to review a decision of the Eastland Court of Appeals holding that a Memorandum of Lease with a different expiration date than the lease itself creates a fact issue as to the interpretation of the lease that defeats summary judgment.

Apache Corporation v. Apollo Exploration, LLC; Cogent Exploration, Ltd. Co.; and Sellmoco, LLC (No. 21-0587) arose from a dispute over purchase and sale agreements (PSAs) of a percentage of the working interests for 109 oil and gas leases in the Texas Panhandle. Most of the acreage covered by the leases (120,000 acres in all) was included in the Bivins Ranch Lease. Under the PSAs, the sellers Apollo, Cogent, and Sellmoco, obtained two primary rights from the purchaser Apache: (1) for each year of a lease, if Apache decided not to act to perpetuate the lease, it would offer back to the purchasers their original interests; and (2) if Apache received a 2-1 return on the purchase and investment in a particular lease, the sellers could receive back up to a third of the sales price of the lease (the “back in” interest). With respect to the first right, on November 1 of each year Apache provided the purchasers with a plan for the leases for the coming year. If the plan anticipated the loss of a particular lease, Apache had to offer the interest at no cost back to the purchasers (the “affected” lease(s)).

The plaintiff purchasers brought suit against Apache in 2014 alleging that Apache breached the PSAs by not providing either written pay-out statements for purposes of the “back-in” provision or written budgeted drilling commitments, failing to offer the purchasers back assignment of leases not perpetuated, and shorting the purchasers on their share of the proceeds from production of the leases. The purchasers offered testimony from two experts on the calculation of damages based on a Memorandum of Lease that apparently misstated the expiration date of the primary leases as December 31 rather than January 1. This resulted in a valuation methodology that produced nearly $190 million in damages, rather than the $5.8 million (at most) based on the January 1 expiration date. (The reason for this dramatic difference is that using the earlier date allowed the purchasers to value their interests at a much higher per acre rate of 2014 rather than 2015.) A Midland County trial court granted Apache’s motion to exclude the purchasers’ expert based on the unambiguous January 1 expiration date in the lease itself. It also granted Apache’s summary judgment motions related to the interpretation of the “back in” interest provision in the PSA’s (i.e., the meaning of “affected leases”), the purchasers’ breach of trust, breach of fiduciary duty, and misapplication of fiduciary property claims, and an issue involving accounting for the working interests of a purchaser, Gunn Oil, that did not join the lawsuit. The trial court further awarded Apache $4 million in attorney’s fees.

In a long and detailed opinion, the Eastland Court of Appeals affirmed in part and reversed in part. The court of appeals affirmed the trial court’s summary judgment rulings on the interpretation of the term “lease” and “affected leases and the tort claims. But, holding that a collateral document—a Memorandum of Lease—designating the expiration date of the primary lease one day earlier than the lease itself created a fact issue of when the lease expired, the court of appeals reversed with regard, among other things, to the calculation of damages and the attorney’s fee award. Apache sought review.

In its petition, Apache argues that the court of appeals deviated from well settled Texas law holding that extrinsic collateral documents may not be used to interpret an unambiguous oil and gas lease. Noting that no other court of appeals has ruled that way (and at least one, the Corpus Christi court of appeals, has ruled the opposite), Apache urged the Court to accept review and correct an erroneous decision that “permits the manufacture of fact questions in any case construing an oil and gas lease where otherwise none exist.” Apache points out that a Memorandum of Lease is an informal document designed to give notice that a lease exists on specific property without revealing the confidential details of the lease itself. If these memoranda, which are filed after—and sometimes a good while after—the execution of the lease, can be dredged up and used to attack and otherwise unambiguous lease, it seems likely that a lot of litigation in the oil patch that should never advance beyond summary judgment will result. The Court will hear oral arguments in October.

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