Many companies operate more than one entity, and oil and gas operators are no different. But what they may not realize—or simply disregard—is the fact that insufficient separation between those entities could expose all to liability to all owned entities. The Eleventh Court of Appeals of Texas recently reviewed a trial court judgment that found that two separate entities were jointly and severally liable for unpaid invoices that were incurred by only one.
A Baylor County lease was taken by Seven Holdings, as lessee. It was later assigned to 7N Oil & Gas on August 27, 2008, and recorded in the official records of Baylor County. However, even though the records filed with the Texas Railroad Commission showed 7N Oil & Gas as operator, they incorrectly show Seven Holdings’ address, rather than the correct address of 7N Oil & Gas. The general partner for both Seven Holdings and 7N Oil & Gas was Jabela Holdings, L.L.C. (Jabela).
7N Oil & Gas hired a contract pumper to work on the lease. The pumper engaged Mathis & Sons to provide oilfield and fluid disposal services on the lease. Mathis & Sons also rented and delivered a frac tank lease. The pumper told the president of Mathis & Sons to send the invoices for the provided services to 7N Oil & Gas.
Twenty-two invoices were sent by Mathis & Sons to Seven Holdings’ address, but, since they were not sure of the correct party to bill, the sender addressed the invoices with various names, including “7N Holdings, L.P.,” “7N Oil and Gas,” and “7N Holding Company.” 7N Oil & Gas paid only two. In an effort to determine whom they should file a lien against, Mathis & Sons checked the county records. In doing so, Mathis and Sons missed the Assignment to 7N Oil & Gas. Therefore, Mathis made a demand on Seven Holdings for the balance of the unpaid invoices. After failing to get payment, Mathis & Sons filed a lien on the lease. Mathis & Sons also removed the rented frac tank from the lease, after emptying the contents of the tank into the casing of the lease well.
When the invoices still were not paid, Mathis & Sons filed a foreclosure and enforcement suit against Seven Holdings. When Seven Holdings complained that they were not the proper party in the suit, Mathis and Sons also added 7N Oil & Gas as an additional defendant. The trial court found that both Seven Holdings and 7N Oil & Gas were liable for the debt, despite the fact that they were two separate entities. Seven Holdings and 7N Oil & Gas appealed the judgment.
At the appellate level, Seven Holdings and 7N Oil & Gas claimed Seven Holdings could not be liable for the debts of 7N Oil & Gas. In an effort to support their claim, they argued that there was no evidence to suggest that the two distinct entities acted or operated as one. Mathis & Sons argued that the two entities had a “long history of muddled transactions” that “sufficiently supported their joint and several liability.”
The evidence at trial showed that Mathis & Sons were given no explanation as to why the invoices were not paid. It further showed that Mathis & Sons could not determine which partnership it was employed by because one of the principals acted as though he operated the lease “either personally or as an agent of both partnerships.” Documents supported this assertion by showing that the two partnership names and addresses were used interchangeably in Railroad Commission filings.
The Court of Appeals upheld the trial court judgment, and both Seven Holdings and 7N Oil & Gas were liable for the debt of 7N Oil & Gas. Because many operators have more than one entity in the hopes of protecting assets, this case should be a reminder to them to keep each entity separate and distinct. As we see, even interchanging addresses on Railroad Commission documents (which could be an honest mistake) was an important fact for the Court in determining if the entities were truly stand alone. Take care of the separation of your entities, even simple, seemingly inconsequential details, and protection of assets will follow.