In Freeport-McMoRan Oil & Gas LLC v. 1776 Energy Partners, LLC, — S.W.3d —, No. 22-0095, 2023 WL 3556695 (Tex. 2023), the Texas Supreme Court held that, as a matter of law, the operator of a joint operating agreement, Ovintiv, did not owe interest on production payments owed to the non-operator, 1776 Energy, that Ovintiv withheld until a separate lawsuit involving 1776 Energy was resolved by the Texas Supreme Court. In doing so, the Court held for the first time that the phrase "would affect distribution of payments" in Texas Natural Resources Code § 91.402(b)—otherwise known as the "Safe-Harbor Provision"—refers to expected future events, and that whether, under that same provision, "reasonable doubt" exists as to the payee's title to an interest in the proceeds can be determined as a matter of law.
The dispute originated from certain joint operating agreements executed by Ovintiv and 1776 Energy, under which Ovintiv was the operator, to develop and produce minerals from oil and gas leases in Karnes County, Texas. Under those agreements, Ovintiv was obligated to pay 1776 Energy a proportionate share of the production obtained from the leases.
After those agreements were executed, a third party, Longview, sued 1776 Energy claiming that Longview's directors breached a fiduciary duty owed to Longview by acquiring the Karnes County property for 1776 Energy (the "Longview lawsuit"). The trial court ruled in favor of Longview and imposed a constructive trust on the Karnes County property until 1776 Energy transferred that property to Longview. 1776 Energy then appealed the judgment and posted $25 million in cash with the trial court to suspend enforcement of the judgment. The lawsuit was eventually heard by the Texas Supreme Court, where it affirmed the court of appeals' judgment that Longview was not entitled to relief in the trial court. Longview filed a motion for rehearing, but the Court denied that motion and issued its mandate.
After learning of the trial court's judgment, Ovintiv began withholding production payments to 1776 Energy. In response, but before the court of appeals ruled on the Longview lawsuit, 1776 Energy sued Ovintiv, claiming that Ovintiv breached the joint operating agreements by withholding payments. Ovintiv nonetheless continued withholding payments until the Texas Supreme Court issued its mandate, at which point Ovintiv issued all outstanding payments to 1776 Energy without interest. Despite receiving those payments, 1776 Energy continued pursuing its lawsuit against Ovintiv to collect interest that accrued during the time the payments were withheld.
Ovintiv filed multiple motions for summary judgment in which it argued that it was entitled to withhold the payments until the Longview lawsuit was resolved without incurring interest pursuant to the Safe-Harbor Provision. The trial court granted the last of Ovintiv's motions and rendered judgment in favor of Ovintiv. 1776 Energy appealed that ruling to the San Antonio Court of Appeals, and the court held in favor of 1776 Energy and reversed the trial court's ruling. Ovintiv appealed that decision to the Texas Supreme Court.
Texas Natural Resources Code § 91.402(a) requires "payors"—which included Ovintiv—to pay proceeds on oil and gas production within a certain time period. If payments are not made within that time period, payors must pay interest on the proceeds to the payees. However, the Safe-Harbor Provision permits payors to withhold payments beyond that time period without incurring interest if (1) "there is . . . a dispute concerning title that would affect distribution of payments"; or (2) if "there is . . . a reasonable doubt that the payee . . . has clear title to the interests in the proceeds of production." Ovintiv argued that it established that both provisions applied as a matter of law.
For the first provision, 1776 Energy argued that, while a dispute concerning title existed, that dispute would not affect the distribution of payments. It reasoned that after the trial court's judgment in the Longview lawsuit was rendered, it retained legal title to the payments because the payments were owed to it as the trustee of the constructive trust, and that it retained equitable title to the payments because it tendered $25 million in cash to the trial court to suspend enforcement of the judgment. In other words, 1776 Energy argued that payments should have been made to it after the final judgment was rendered because, even if the judgment were affirmed on appeal, it would be required by law to transfer those payments to Longview. So, even if it were determined that Longview, and not 1776 Energy, was entitled to the payments, those payments would still be given to Longview via a transfer from 1776 Energy.
The Court disagreed with 1776 Energy's rationale. It construed the phrase "would affect" as requiring only an expected future effect. Accordingly, Ovintiv was entitled to withhold payments if, at the time of withholding, the title dispute was at least expected or likely to influence or alter the distribution of the payments Ovintiv owed to 1776 Energy.
The Court then held that, as a matter of law, the Longview lawsuit was expected or likely to influence or alter such payment distributions. If the Longview lawsuit were resolved in favor of 1776 Energy, then Ovintiv would have been required to pay 1776 Energy. By contrast, if the Longview lawsuit were resolved in favor of Longview, then Ovintiv would have been required to pay Longview. Therefore, the party entitled to the proceeds was subject to change depending on the outcome of the Longview lawsuit, meaning that, at the time Ovintiv withheld payments, the Longview lawsuit "would affect" the distribution of the payments. 1776 Energy also argued that the title dispute was resolved when the court of appeals affirmed the trial court's judgment, but the Court disagreed because Ovintiv filed a petition for review with the Court, and the Court's decisions are not final until it issues a mandate.
For the second provision, 1776 Energy argued that whether a "reasonable doubt" existed as to whether it had clear title to the payments was a question of fact and that, therefore, the trial court erred in ruling on that question as a matter of law. The Court again disagreed with 1776 Energy. It reasoned that reasonableness has always been an objective inquiry, and that questions of reasonableness are only submitted to a factfinder when there is a disagreement about the facts that would prevent a court from determining an objective answer. But when only one reasonable inference may be drawn from the undisputed facts, reasonableness may be determined as a matter of law. Accordingly, the Court held, for the first time, that whether a reasonable doubt exists as to title under the Safe-Harbor Provision may be determined as a matter of law.
As for Ovintiv, it had reasonable doubt that 1776 Energy had clear title to the payments as a matter of law. The trial court's imposition of a constructive trust established that 1776 Energy wrongfully possessed property, rendering its title to the payments inherently unclear. And such title remained unclear until the Longview lawsuit was resolved. Accordingly, Ovintiv was entitled to withhold payments to 1776 Energy pursuant to the Safe-Harbor Provision until the Court issued its mandate in the Longview lawsuit.
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