Case: 08-40840 Document: 00511189321 Page: 1 Date Filed: 07/29/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
July 29, 2010
No. 08-40840 Lyle W. Cayce
Clerk
In the Matter of: MOOSE OIL & GAS CO; MOOSE OPERATING COMPANY
INC,
Debtors
O LEE TAWES, III
Appellant
v.
DORIS BARNES, Individually and as Independent Executrix of the Estate of
Leon McNair Barnes, Deceased
Appellee
Appeal from the United States District Court
for the Southern District of Texas
Before GARWOOD, SMITH, and CLEMENT, Circuit Judges.
PER CURIAM:
As stated below, this case involves important and determinative questions
of Texas law as to which there is no controlling Texas Supreme Court precedent.
Accordingly, we certify those unresolved questions to the Supreme Court of
Texas.
Case: 08-40840 Document: 00511189321 Page: 2 Date Filed: 07/29/2010
No. 08-40840
CERTIFICATION FROM THE UNITED STATES COURT OF
APPEALS FOR THE FIFTH CIRCUIT TO THE SUPREME COURT
OF TEXAS, PURSUANT TO THE TEXAS CONSTITUTION ART. 5,
§ 3-C AND TEXAS RULE OF APPELLATE PROCEDURE 58.1.
TO THE SUPREME COURT OF TEXAS AND THE HONORABLE
JUSTICES THEREOF:
I. Parties & Counsel
The Style of the case is O Lee Tawes, III, Appellant, v. Doris Barnes,
Individually and as Independent Executrix of the Estate of Leon McNair Barnes,
Deceased, Appellee, No. 08-40840, in the United States Court of Appeals for the
Fifth Circuit, an appeal by appellant O. Lee Tawes, III, from the judgment of the
United States District Court for the Southern District of Texas, Victoria
Division, affirming in part and reversing in part the November 2009 judgment
of the United States Bankruptcy Court for the Southern District of Texas in the
adversary proceeding, styled Doris Barnes v. Marlin Data Research, Inc., et al,
pending in the bankruptcy proceeding in said court styled In the Matter of:
Moose Oil & Gas Co; Moose Operating Company Inc., Debtors.
The appellant, O Lee Tawes, III, is represented by Barnet B. Skelton, Jr.
of Barnet B. Skelton, Jr. P.C., 1111 Bagby St., 47th Floor, Houston, Texas 77002,
Tel. 713-659-8761. Doris Barnes, the appellee, is represented by Tom Kirkendall
of the Law Office of Tom Kirkendall, 2 Violetta Ct., The Woodlands, Texas
77381-4450, Tel. 281-364-9946 and Dick Watt, of Watt Beckworth Thompson &
Henneman, LLP, 711 Louisiana St., 1800 South Tower, Houston, Texas 77002,
Tel. 713-650-8100.
II. Statement of the Case
This case involves the construction and application of the hereinbelow
identified Texas oil and gas Working Interest Unit Agreement and Joint
Operating Agreement.
2
Case: 08-40840 Document: 00511189321 Page: 3 Date Filed: 07/29/2010
No. 08-40840
A. The Leases, Lessors, & Lessees
In 1996, Moose Oil & Gas Company (Moose O&G) acquired oil, gas and
mineral leases in Lavaca County, Texas. Moose O&G assigned some of its lease
interests to a group of investors (the Moose Assignees), including appellant
herein O. Lee Tawes, III (Tawes). Collectively, these lands will be referred to as
the Baker Lease.
Also in 1996, American Exploration Company acquired from Leon Barnes
and Doris Barnes (appellee herein individually and as executrix of the estate of
Leon Barnes, deceased) an oil, gas and mineral lease (the Barnes Lease). The
Barnes Lease covered 345.5 acres of property adjacent to the Baker Lease.
Ultimately, American Exploration Company’s interest in this lease was passed
to Louis Dreyfus Natural Gas Corporation, which interest in turn later passed
to Dominion Oklahoma Texas Exploration and Production, Inc. (collectively
Dominion).
In July 1998, Moose O&G, the Moose Assignees, Dominion and Seisgen
Exploration Inc. (Seisgen) pooled their interests in the oil, gas and mineral
leases discussed above.1 Of the 640 total acres in the pooled unit, the Barnes
lease constituted 54% of the land. Each of these parties agreed to be bound by
the terms of a Working Interest Unit Agreement (WIUA) and an attached Joint
Operating Agreement (JOA). Dominion later acquired Seisgen’s interest.
The WIUA designated Dominion as the operator of any wells that would
be drilled on the pooled unit. Dominion drilled and operated wells on the pooled
unit. Moose O&G proposed to drill two additional wells that would have their
surface location on the Baker Lease, but would directionally extend to bottom
1
At the time, the Barnes Lease contained an express no-pooling clause. Dreyfus,
Dominion’s predecessor in interest, obtained a pooling agreement from Barnes in exchange for
$125,000, access to 3D seismic test results, and the release of certain shallow rights from the
Barnes’ lease.
3
Case: 08-40840 Document: 00511189321 Page: 4 Date Filed: 07/29/2010
No. 08-40840
out under the Barnes Lease. The contracts allowed Dominion to not participate
in the drilling of these wells if it chose to go “non-consent.” For a certain “non-
consent” period under the contract, Dominion would not receive any revenues
from production, nor would it incur liabilities in drilling and maintaining the
wells.
Dominion elected to go “non-consent” on the proposed wells. Moose O&G
decided to and did drill and operate these two wells (designated Baker-Barnes
Nos. 1 & 2) anyway. Moose O&G and the Moose Assignees, including Tawes,
were Consenting Parties under the WIUA and JOA. At all herein relevant
times, Moose O&G was the operator of the Baker-Barnes Nos. 1 & 2 wells.
B. The Working Interest Unit Agreement
At issue in this case is Tawes’ liability, as a Consenting Party, for royalty
respecting production from the Baker-Barnes 1 & 2 wells under the WIUA and
JOA. The WIUA, in a section titled “Lease Burdens,” provided:
“Each Party hereto shall bear and be responsible for their own lease
burdens including, but not limited to their Lessor's royalty,
overriding royalty along with any and all other royalty burdens
which may have been created by the party contributing the lease or
leases to this Working Interest Unit.”
Further, in a section titled “Provision V,” it also provided that:
“Moose Oil & Gas Company shall be the liable party to the Operator
for the entire forty-six percent (46%) working interest within the
Working Interest Unit for the parties hereinabove referred to as
Moose [including Tawes]. Moose Oil & Gas Company shall be the
responsible party, for each of said parties, to the Operator for
obtaining and delivering any and all elections, notices, invoices
payments and billings.
Should one or more Moose parties decide not to participate in a
proposed operation, the participating Moose party or parties shall
have the option of disbursing the non-participating Moose parties
interest proportionately among the participating Moose parties.”
Finally, in an section titled “Lease Rentals,” the WIUA stated:
4
Case: 08-40840 Document: 00511189321 Page: 5 Date Filed: 07/29/2010
No. 08-40840
“Rentals, shut-in payments, or minimum royalties which may
become due on leases committed hereto shall be paid by the
contributor of the lease to the Working Interest Unit. It is the
obligation of the contributing Lessee to maintain its own lease or
Leases subject to this Agreement.”
The parties agreed in the WIUA that it would be “governed by” the JOA that was
attached as an exhibit to the WIUA.
C. The Joint Operating Agreement
The JOA, in its Article III.B, set out a general scheme of liability apportionment:
“Unless changed by other provisions, all costs and liabilities
incurred in operations under this agreement shall be borne and
paid, and all equipment and materials acquired in operations on the
Contract Area shall be owned, by the parties as their interests are
set forth in [the WIUA]. In the same manner, the parties shall also
own all production of oil and gas from the Contract Area subject to
the payment of royalties to the extent of their interests which shall
be borne as hereinafter set forth.
Regardless of which party has contributed the lease(s) and/or oil and
gas interest(s) hereto on which royalty is due and payable, each
party entitled to receive a share of production of oil and gas from the
Contract Area shall bear and shall pay or deliver, or cause to be
paid or delivered, to the extent of its interest in such production, the
royalty amount stipulated hereinabove and shall hold the other
parties free from any liability therefor. No party shall ever be
responsible, however, on a price basis higher than the price received
by such party, to any other party’s lessor or royalty owner, and if
any such other party’s lessor or royalty owner should demand and
receive settlement on a higher price basis, the party contributing
the affected lease shall bear the additional royalty burden
attributable to such higher price.”
After thus setting out the relationship between the parties generally, the JOA
then specifically addressed the situation where a signatory did not want to take
part in a proposed well drilling operation. If a party did not consent to the
drilling of a proposed well, the JOA gives Consenting Parties the right to drill
anyway and lays out the rights and obligations of the consenting parties. Article
5
Case: 08-40840 Document: 00511189321 Page: 6 Date Filed: 07/29/2010
No. 08-40840
I of the JOA also defined the terms “consenting party” and “non-consenting
party”:
“The terms ‘Drilling Party’ and ‘Consenting Party’ shall mean a
party who agrees to join in and pay its share of the cost of any
operation conducted under the provisions of this agreement. . . .
The terms ‘Non-Drilling Party’ and ‘Non-Consenting Party’ shall
mean a party who elects not to participate in a proposed operation.”
The JOA states in its Article VI.B2, “[t]he entire cost and risk of conducting such
operations shall be borne by the Consenting Parties in the proportions they have
elected to bear. . . .” Finally, in a subsequent portion of its Article VI the JOA
contains the statement that:
“During the period of time Consenting Parties are entitled to receive
Non-Consenting Party’s share of production, or the proceeds
therefrom, Consenting Parties shall be responsible for the payment
of all production, severance, excise, gathering and other taxes, and
all royalty, overriding royalty and other burdens applicable to Non-
Consenting Party’s share of production . . . .”
This JOA provision, which for convenience of identification we call the “Royalty
Provision,” is the language principally at issue here. Barnes argues that Tawes,
as a Consenting Party, is responsible for “all royalty” owed to her.
D. The Resulting Lawsuit
In 2000, Barnes sued Dominion and Moose O&G in Lavaca County, Texas
district court to recover damages to real property, breach of contract for failure
to pay royalties, fraudulent inducement, and negligent misrepresentation.
Tawes and the other Moose Assignees were originally brought into the suit as
third-party defendants. Under her original contract with Dominion, Barnes was
owed a 17.916% royalty. No party, including Tawes, disputes that Barnes was
owed a royalty proportional to her land’s contribution to the pooled unit, or
9.675%. The remaining 8.241% (17.916-9.675) was disputed between the parties.
6
Case: 08-40840 Document: 00511189321 Page: 7 Date Filed: 07/29/2010
No. 08-40840
In February of 2002, Tawes and Marlin Data Research, Inc. (MDR)2
acquired Moose O&G’s working interest in the Baker Lease and the Baker-
Barnes Nos. 1 & 2 wells at a foreclosure sale. The following chart displays the
working interest ownership of the wells at issue:
Tawes MDR
Baker-Barnes Wells: Well 1 Well 2 Well 1 Well 2
Before Feb. 13, 2002: 12.5% 13.1146% 0% 0%
After Feb. 13, 2002: 40.901324% 41.023051% 10.451376% 10.258449%
In March of 2002, payout of the proceeds received from the sale of
production from the Baker-Barnes Nos. 1 & 2 wells was suspended and such
proceeds began to be held in suspense pursuant to court order. The production
payments are held in two accounts: one for the benefit of the working interests,
including Tawes, based on their respective interests in the wells, and another for
the benefit of all the royalty owners.
In April of 2002, Moose O&G filed in the bankruptcy court a voluntary
bankruptcy petition under Chapter 7 of Title 11 of the United States Code. In
August, notice of removal was filed, removing the Barnes’ state-court action to
the bankruptcy court below as part of the Moose O&G bankruptcy proceeding.
In September of 2003, the parties notified the bankruptcy court that a
settlement had been reached among Barnes, Dominion, and the Moose
Assignees, but not Tawes or MDR. Under the terms of the settlement, Barnes
would receive $356,124.96. Barnes agreed to ratify her royalty to the undisputed
9.675% in all the wells in the pooled unit and release her claims against the
parties to the settlement agreement. Dominion agreed to release its third-party
claims against the Moose Assignee signatories to the settlement agreement. The
bankruptcy court issued a Final Case Management Order directing all non-
2
MDR is a Texas Corporation that is owned by John F. Terwilliger, the former CEO
and majority owner of Moose O&G.
7
Case: 08-40840 Document: 00511189321 Page: 8 Date Filed: 07/29/2010
No. 08-40840
settling parties to file amended pleadings and a stipulation of facts and law.
Barnes amended her complaint to allege that Tawes and MDR were responsible
for royalties due from Baker-Barnes Nos. 1 and 2 wells that accrued prior to
February 2002. In October 2004, the bankruptcy court approved the settlement.
In August of 2006, the bankruptcy court found Tawes, but not MDR, liable
to Barnes for unpaid royalties on the Barnes Nos. 1 and No. 2 wells that accrued
from the date of first production to February 2002. Specifically, the bankruptcy
court relied on the above-noted Royalty Provision of the JOA stating that
Consenting Parties shall be responsible for “all royalty” applicable to the non-
Consenting Party’s share of production. However, the bankruptcy court found
no evidence that Barnes was owed 17.916% royalty. Instead, the bankruptcy
court held that Barnes was owed royalty proportional to her land’s contribution
to the pooled unit, or 9.675%—the undisputed royalty amount. The bankruptcy
court held that Barnes’ damages, $291,846, should not be offset by her
settlement with Dominion and the other Moose Assignees because the evidence
does not establish which portion of the settlement, if any, was payment of the
pre-February 2002 royalties, as opposed to post-February 2002 royalties or
damages for her claims of fraudulent inducement and negligent
misrepresentation.3 Finally, the bankruptcy court rejected Barnes’ claim for
attorneys fees.
Tawes appealed the bankruptcy court’s decision to the United States
District Court for the Southern District of Texas. Barnes cross appealed the
bankruptcy court’s decision on attorneys fees. The district court affirmed the
bankruptcy court’s holding as to liability, but reversed its decision on attorneys
fees and remanded it for factual development. The district court compared MCI
Telecommunications Corp. v. Texas Utilities Electric Co., 995 S.W.2d 647 (Tex.
3
The bankruptcy court held that Tawes did not establish proof by a preponderance of
the evidence that Barnes’ damages should be offset by the Dominion settlement.
8
Case: 08-40840 Document: 00511189321 Page: 9 Date Filed: 07/29/2010
No. 08-40840
1999), with Stine v. Stewart, 80 S.W.3d 586 (Tex. 2002), and held that Barnes
was a third-party beneficiary of the WIUA and JOA. Interpreting the contract
under Texas law, the district court held that the contract did not preclude
recovery against Barnes. Finally, it held that the Non-Consenting Parties had
bargained for the consenting parties to be fully liable for all royalties due by a
Non-Consenting Party.
III. Legal Issues
A. Barnes Rights Under the WIUA and JOA
As an initial matter, Tawes argues that the lower courts erred in holding
that Barnes was a third-party beneficiary to the WIUA and the JOA. He claims
that the JOA was not intended to be for the benefit of lessors and as a result,
under Texas law, the JOA created no third-party liability.
Under our reading of Texas law, a contract creates a third-party creditor
beneficiary only if the signatories (l) intended to confer a benefit on that third-
party and (2) entered the contract to confer that benefit on the third party. MCI
Telecomm. Corp., 995 S.W.2d at 651. The language of the contract must be clear,
and the intent of the contracting parties controls. Id. “[A] presumption exists
that parties contracted for themselves unless it ‘clearly appears’ that they
intended a third party to benefit from the contract.” Id. For this purpose, there
seems to be a distinction between direct or express benefit, on the one hand, and
incidental benefit on the other hand. Stine, 80 S.W.3d at 586. That a contract
incidentally benefits some third party is insufficient to establish an intent to
create a third-party beneficiary. Id. The would-be third-party beneficiary has
the burden of proof on this issue. MCI Telecomm. Corp., 995 S.W.2d at 651.
The instant case seems to fall somewhere between Stine and MCI
Telecommunications. In Stine, the would-be beneficiary was named in a couple's
divorce agreement as a creditor to whom a debt was owed. Stine, 80 S.W.3d at
588. The divorce agreement also clearly defined the terms of the repayment due
9
Case: 08-40840 Document: 00511189321 Page: 10 Date Filed: 07/29/2010
No. 08-40840
to the beneficiary. Id. The court noted that the divorce agreement was not solely
intended to provide for repayment of the would-be beneficiary. Id. at 591. But
the court held that express references to the beneficiary and the clear intent to
ensure her repayment created more than an incidental benefit, and was
sufficient to make her a third-party creditor beneficiary under the terms of the
divorce agreement. Id. at 591–92.
In MCI, however, that company sought to install fiber optic cable along a
railroad right-of-way. MCI Telecomm. Corp., 995 S.W.2d at 648–49. Years
before, Texas Utilities had installed transmission poles along that same
right-of-way. MCI contractually agreed with the railroad to “secure such
permission as may be necessary on account of any other existing rights in any
third party (including, without limitation, rights of . . . licensees[) and] MCI
hereby agrees to exercise the herein granted rights in such a manner as not to
interfere in any way with any existing prior rights.” Id. at 649. Texas Utilities
claimed MCI's work damaged its transmission poles and sought to enforce its
rights as a third-party creditor beneficiary under MCI's contract with the
railroad. Id. The court in MCI held that the contract created no third-party
beneficiary rights for licensees. Id. at 652. As in MCI, the JOA identifies a
specific group of royalty owners that Barnes argues have third-party beneficiary
rights.
While the MCI contract seemingly identifies a definite group of potential
third-party beneficiaries, an arguably significant difference between Stine and
MCI may be that the MCI contract does not identify what rights of the class are
to be respected. Unlike MCI, but like Stine, the contract here identifies a
specific, limited group of individuals and identifies what rights are owed to the
those individuals (payment of royalties). Further, in MCI, there was particular
language in the contract that explicitly stated that the contract was not to be
interpreted as conferring any benefits on non-signatory parties. Id. In fact,
10
Case: 08-40840 Document: 00511189321 Page: 11 Date Filed: 07/29/2010
No. 08-40840
opinions in some Texas cases state that MCI turned on that express language
in the contract. E.g., Pratt-Shaw v. Pilgrim’s Pride Corp., 122 S.W3d 825, 831
(Tex. App.—Dallas 2003, pet. denied). No party has asserted that such a clause
exists in either the WIUA or the JOA.
Barnes also makes an alternative argument that even if she is not a
third-party creditor beneficiary, she has a basis of recovery against Tawes
because they are in privity of estate. “Liability to the original lessor for the
payment of rent or the performance of other lease covenants may arise from
either privity of contract or privity of estate.” Amco Trust Inc. v. Naylor, 159
Tex. 146, 149–50, 317 S.W.2d 47, 50 (1958). She argues that Tawes came into
privity of estate with her by undertaking the obligation to pay royalty under the
Barnes Lease. She further argues that when Tawes increased his interest in the
Baker-Barnes Nos. 1 & 2 wells by acquiring a portion of Moose O&G’s working
interest, Tawes stepped into Moose O&G’s privity of estate with Barnes and
undertook the same obligation as Dominion to pay Barnes’ royalty.
B. Contractual Bar to Recovery
Tawes contends that even if Barnes is a third-party creditor beneficiary,
she cannot enforce her rights against Tawes because Dominion, Barnes’ lessee,
could not have enforced the Royalty Provision against Tawes. As Moose O&G
was the party liable to Dominion on behalf of Tawes, Tawes claims the above-
quoted Provision V4 of the WIUA insulated him from liability. Tawes’ contention
implies that Dominion would only be able to recover from Moose O&G for a
breach of the WIUA so the same is true for Barnes. Barnes can have no greater
rights to reach Tawes than did Dominion, Tawes contends.
4
“Moose Oil & Gas Company shall be the liable party to the Operator for the entire
forty-six percent (46%) working interest within the Working Interest Unit for the parties
hereinabove referred to as Moose.”
11
Case: 08-40840 Document: 00511189321 Page: 12 Date Filed: 07/29/2010
No. 08-40840
As an initial matter, the Royalty Provision on which Barnes relies is
contained in the JOA, while Provision V on which Tawes relies is contained in
the WIUA. If Barnes is a third-party creditor beneficiary of the JOA, she
arguably has individual standing to assert her rights thereunder. Her
third-party beneficiary status relies on her lease to Dominion, however, so
Dominion's rights under the contracts are relevant. In short, if Dominion could
hold Tawes liable for breach of the JOA's Royalty Provision, and Barnes is a
third-party beneficiary of the JOA, then she too, arguably could hold Tawes
liable for breach of the JOA's Royalty Provision. The question then would
appear to be whether Dominion could have held Tawes liable—separately from
Moose—for a breach of the Royalty Provision.
Tawes was both a named party and a Moose Assignee under the terms of
the WIUA. Provision V of the WIUA appears to have shielded Tawes from
liability to the WIUA Operator, Dominion. Consequently, if a Moose Assignee,
such as Tawes, breached the WIUA, Dominion’s recourse would appear to have
been against Moose O&G. This may not necessarily be true for the JOA,
however. The language of Provision V of the WIUA seems to make Moose O&G
liable on behalf of the Moose Lessees to the Operator. The WIUA and the JOA
named Dominion as the Operator, but Dominion was not the Operator of the
Baker-Barnes Nos. l and 2 wells. Dominion went Non-Consent on the
development of those two wells, and the Consenting Parties selected Moose as
the Operator. As a result, Provision V of the WIUA may be less relevant, and
the JOA’s Royalty Provision may become the operative language. Further, the
WIUA states, “the Working Interest Unit . . . will be governed by the Operating
Agreement attached hereto.” The JOA's Royalty Provision assigns liability as
between Consenting Parties and Non-Consenting Parties, rather than as
between operator and non-operators.
12
Case: 08-40840 Document: 00511189321 Page: 13 Date Filed: 07/29/2010
No. 08-40840
The issue seems to turn on the relationship between the WIUA and the
JOA, and which is given priority. Tawes contends that greater weight must be
placed on the WIUA; Barnes argues the JOA controls.5
C. Apportionment of Recovery
The district court found Tawes liable for all royalties owed to Barnes from
Baker-Barnes Nos. 1 and 2 wells that accrued as of February 2002. Tawes
contends that the court erred, because he can, at most, be held responsible only
for an amount proportionate to his interest in the properties at that time. Tawes
asks this court to reduce the judgment by the corresponding amount. Tawes cites
contract language limiting each party's responsibility to its proportionate share.
He relies on, inter alia, Article III.B of the JOA, which states that “[u]nless
changed by other provisions . . . the parties shall also own all production of oil
and gas from the Contract Area subject to the payment of royalties to the extent
of their interests.” JOA Article I (“Definitions”) bolsters this language, according
to Tawes.6
The district court determined that the above-quoted JOA “Royalty
Provision” modified the proportionate share language generally employed in the
WIUA and JOA by expanding the liability of Consenting Parties to the payment
of “all royalty.” The court noted that the Consenting Parties' allocation of costs
5
We note in passing that Tawes additionally and separately contends that because
Barnes released Dominion from liability in the Settlement, she has lost whatever status she
might have had under the JOA. The district court noted that that issue was not preserved for
appeal to the district court under Bankruptcy Rule 8006 because Tawes did not include it in
his appellate briefs nor in his statement of issues on appeal. Tawes did not raise this issue
before the bankruptcy court, but raised it for the first time on motion for rehearing before the
district court. As a matter of federal procedural law, we affirm the district court’s ruling
because Tawes waived this additional, separate settlement issue by waiting until a motion for
rehearing to raise it. See In re GGM, P.C., 165 F.3d 1026, 1031–32 (5th Cir. 1999).
6
Tawes points to Article I, paragraph G, which states: “The terms ‘Drilling Party’ and
‘Consenting Party’ shall mean a party who agrees to join in and pay its share of the cost of any
operation conducted under the provisions of this agreement.” (emphasis added).
13
Case: 08-40840 Document: 00511189321 Page: 14 Date Filed: 07/29/2010
No. 08-40840
was explicitly limited to each party's proportionate share whereas what we call
the Royalty Provision of the JOA contained no such limitation. While the WIUA
and JOA generally allocate responsibilities proportionately, Article III.B of the
JOA, which generally sets out proportionate sharing of costs and production,
begins by stating “Unless changed by other provisions.” The argument goes that
such sophisticated parties demonstrated their ability to apportion when they
wished and that they did not apportion in what we have called the JOA’s
“Royalty Provision” tends to suggest they did not intend apportionment there.
The district court then distinguished costs from royalties:
“[T]he relationship between non-operators and operators involving
royalty payments is distinct from the relationship between non-
operators and operators involving development and operation costs.
First, each non-operator independently chooses whether or not he
will be specifically responsible for royalty payments. As lessees, the
non-operators choose to specifically obligate themselves to their
lessors for royalties under their respective oil, gas and mineral
leases. Therefore, the share of royalties due by each non-operator
under the WIUA and JOA corresponds to his individual liability
under his respective lease, except in the case of non-consent
operations. In the case of non-consent operations, the parties
independently choose whether or not they wish to participate, and
therefore have control over whether or not to specifically incur
additional royalty obligations. Second, the operators in this case
have no discretion over royalty payments. Operators may not choose
who to pay royalties to, what percentage royalty to pay, or when to
pay royalties.”
If royalties are for this purpose distinguishable from costs, then apportionment
arguably may not be appropriate. Nonetheless, if the contractual interpretation
under Texas law reveals the intent of the parties was to apportion, then that
intent likely should be given effect.
In sum, the language in the JOA, “Consenting parties shall be responsible
for the payment of . . . all royalty,” is arguably consistent with two
interpretations. First, it could mean that each Consenting Party is responsible
14
Case: 08-40840 Document: 00511189321 Page: 15 Date Filed: 07/29/2010
No. 08-40840
for all royalty.7 Second, it could mean that Consenting Parties as a group are
responsible for all royalty.
IV. Questions Certified
We accordingly hereby certify the following three determinative questions
of Texas law to the Supreme Court of Texas:
1. The Barnes leased their land to Dominion’s predecessors in interest.
Moose O&G and the Moose Assignees, including Tawes, leased the adjacent
lands. Dominion, Moose O&G, and the Moose Assignees, including Tawes,
signed the WIUA and JOA in an effort to pool the Barnes’ lease with adjacent
lands. Dominion did not consent under the contract to the drilling of two wells
on the pooled land. Moose O&G and the Moose Assignees, including Tawes,
consented to the drilling of these two wells.
Certified Question One: Does Barnes have any right enforce the contract
– the WIUA and JOA – between Dominion, Moose O&G, and the Moose
Assignees, including Tawes, to recover unpaid royalties, between the date of first
production and February 2002, of Baker-Barnes Nos. 1 & 2 wells under what we
have called the “Royalty Provision” of the JOA, either as a third-party
beneficiary of the WIUA and JOA or by virtue of having privity of estate with
Tawes?
2. The WIUA states that Moose O&G “shall be the liable party to the
Operator” on behalf of the Moose assignees, including Tawes. Dominion’s
predecessor-in-interest was originally agreed to be the Operator of the wells
drilled. Dominion exercised its rights under the contract to remain a Non-
7
If the interpretation that each Consenting party is responsible for all royalty is
correct, another issue, potentially relevant to the case, is the question of whether Barnes may
recover from Tawes more than the amount of production attributable to Tawes. That is, if
Tawes is responsible for “all royalty” of Barnes, is he personally liable for any royalty beyond
the actual amount he received from production from the Baker-Barnes 1 and 2 wells or is he
only liable for “all royalty” up to the amount he received from that production?
15
Case: 08-40840 Document: 00511189321 Page: 16 Date Filed: 07/29/2010
No. 08-40840
Consenting Party to the wells at issue, and Moose O&G was the operator
thereof. The JOA states that “[C]onsenting Parties shall be responsible for the
payment of . . . all royalty, overriding royalty and other burdens applicable to
Non-Consenting Party’s share of production.”
Certified Question Two: If Barnes may enforce the contract, does the
WIUA prevent Barnes from recovering from Tawes?
3. The JOA states, “[u]nless changed by other provisions . . . the parties
shall also own all production of oil and gas from the Contract Area subject to the
payment of royalties to the extent of their interests.” As a Non-Consenting Party
under the contract, Dominion, Barnes’ lessee, received no production during the
consenting period. The Royalty Provision states that in this situation,
Consenting Parties are responsible for all production.
Certified Question Three: If Tawes, as a Consenting Party, is responsible
for royalties under the JOA, does the JOA Royalty Provision change the
agreement within the JOA such that Tawes is responsible for all of Barnes’
unpaid royalty jointly and severally, or does the JOA limit Tawes’ liability for
unpaid royalty to the extent of his interest in the two wells at issue between the
date of first production and February 2002?
We disclaim any intention or desire that the Supreme Court of Texas
confine its reply to the precise form or scope of the questions certified.
16