Justice Jeff Boyd
The Texas Supreme Court has ruled that an operator who withheld payments from oil-and-gas production to a non-operating owner was justified under the “safe-harbor” provision in § 91.402(b), Natural Resources Code.
As we reported some months ago, Freeport-McMoran Oil & Gas, LLC and Ovintiv USA Inc. v. 1776 Energy Partners, LLC (No. 22-0095) arose from a dispute over whether Ovintiv, the operator of certain oil and gas wells as part of a joint production agreement with 1776, unreasonably withheld proceeds of production during the pendency of a separate lawsuit that challenged 1776’s title to mineral interests produced under the agreement. In that lawsuit, commenced a few months prior to the execution of the joint production agreement at issue in this case, Longview Energy alleged that 1776 breached its fiduciary duty to Longview by taking a corporate opportunity. The trial court found in favor of Longview and ordered 1776 to transfer legal title to its mineral interests to Longview. Pending such transfer, the court ordered further, 1776 was required to hold legal title as a constructive trustee for Longview’s use and benefit. 1776 appealed the judgment and posted a supersedeas bond to suspend enforcement. Shortly thereafter, Ovintiv stopped sending payments due under the joint operating agreement to 1776.
1776 subsequently sued Ovintiv for withholding payments under the JOA and for interest accrued on those payments. Ovintiv answered that the safe harbor provision, § 91.402(b), Natural Resources Code, authorized it to withhold payments if there is a dispute concerning title that affects the distribution of payments or a reasonable doubt that the payee (1776) has clear title to the interest in the proceeds of production. Ovintiv argued that the Longview lawsuit met both of the statutory conditions. The trial court agreed and granted summary judgment for Ovintiv and awarded attorney’s fees. 1776 appealed.
The San Antonio Court of Appeals reversed and remanded to the trial court. On appeal, 1776 argued that the Longview judgment did not affect the distribution of proceeds because 1776 continued to hold title to the interests pending appeal (the judgment ordering it to transfer the interests had been superseded, preserving the status quo ante). Alternatively, 1776 contended, it held title as trustee of the constructive trust created by the Longview judgment. Ovintiv countered that until 1776 exhausted its appeals of the Longview judgment, the title dispute hung in the air. (In 2017, SCOTX affirmed the San Antonio Court of Appeals’ ruling reversing the Longview judgment and rendering a take-nothing judgment in favor of 1776).
The court of appeals found it unnecessary either to consider the effect of the supersedeas bond or whether the Longview judgment created a dispute concerning title. Instead, the court resolved the issue in Longview’s favor based on the statutory language requiring a title dispute “to affect the distribution of payments.” Here, the court reasoned, the Longview judgment did not affect the distribution of payments at all. Whether 1776 held title outright or in a constructive trust for Longview made no difference to the Ovintiv’s obligation to pay the proceeds under the joint operating agreement. Regarding Ovintiv’s argument that the Longview judgment raised a reasonable doubt that 1776 had clear title as a matter of law, the court held that 1776 created a fact issue as to the “reasonableness” of Ovintiv’s withholding because Ovintiv was the only operator that withheld payments to 1776 on interests potentially affected by the Longview judgment. Thus, the trial court erred in granting summary judgment to Ovintivon that issue.
In an opinion by Justice Boyd, SCOTX reversed the court of appeals and reinstated the trial court’s judgment. The primary issue was whether Ovintiv’s withholding of payments met the statutory test of § 91.402(b)(1), which permits withholding without interest if “there is … a dispute that would affect distribution of payments.” Justice Boyd construed “would affect” to mean that Ovintiv was entitled to withhold payments without interest “if the dispute concerning title was, at that time, at least expected or likely to influence or alter the distribution of payments Ovintiv owed to 1776 Energy under the joint-operating agreements.” The Court thus rejected the court of appeals’ determination that the statute required a “current affect” rather than a “future” one. Ovintiv could not have been sure how the Longview lawsuit would be resolved until a final mandate a mandate was issued by the court of appeals (which did not occur because Longview filed a petition for review) or SCOTX. “Until then,” Justice Boyd reasoned, “the dispute still existed because Longview could file a motion for rehearing and convince us to change our judgment. In short, the dispute between 1776 Energy and Longview existed at least until our mandate after affirming the court of appeals’ judgment.” The safe-harbor provision thus applied to Onitiv’s withholding as a matter of law.
The Court went on to hold that Onitiv could withhold payments without interest under the second safe-harbor provision, § 92.402(b)(1)(B)(ii), which applies if the payor has a “reasonable doubt” that the payee had “clear title to the interest in the proceeds of production.” As discussed above, 1776 argued and the court of appeals found that “reasonable doubt” raised fact issues to be decided by the factfinder. Rejecting this approach, Justice Boyd observed that resolving the “reasonableness” of Ovintiv’s belief required an objective test that could be met as a matter of law. Here there were no fact issues requiring the factfinder to determine what happened or why, and the Court could not find any case supporting the position that “a factfinder must resolve all issues touching on reasonableness. Rather, the legal standard for reasonableness remains objective even if the ‘controlling facts’ are in doubt. Thus reasonableness may present a question of law ‘when from the facts in evidence but one rational inference can be drawn” (citations omitted). In this case the Court had no difficulty holding that, as a matter of law, Ovintiv had reason to doubt whether 1776 had clear title. As Justice Boyd put it, “[t]he reason is straightforward: Longview’s claims and pending lawsuit, which sought (and eventually obtained) a judgment imposing a constructive trust over 1776 Energy’s interests, clouded 1776 Energy’s title to the production proceeds.”
The Court further rejected 1776’s argument that as trustee of the constructive trust, it retained title and Ovintiv should have kept paying. But as Justice Body pointed out, a court orders a constructive trust when it “concludes the owner possesses the property wrongly or unlawfully” (citations omitted). And even though during the dispute Onitiv continued billing 1776 for its share of the development and operating costs and was the only operator doing business with 1776 that withheld payment, Onitiv still had “reasonable doubt” about 1776’s title by virtue of the ongoing Longview litigation. Moreover, nothing in the law says that bills cannot be sent to an entity with clouded title. “If anything,” Justice Boyd concluded, “the constructive trust justified sending those bills.”
We think is a clear and correct construction of the statute that will, hopefully, reduce future litigation of this kind.
