When JOA’s Pass to Subsequent Purchasers
The Joint Operating Agreement—not always the simplest contract to interpret—can spawn additional issues when “heirs, successors, and assigns” enter the picture.
In late June of this year, TransTexas Gas Corp. (Sandridge Onshore, LLC, is now TransTexas’ successor in interest) filed a petition for review in the Texas Supreme Court, arguing that the appellate court in Corpus Christi erred when it determined that a Joint Operating Agreement was applicable to Sandridge’s interests. Forcenergy Onshore, LLC, replied to the petition on October 1st. A Supreme Court decision could materially affect the way in which older JOAs are treated by and affect subsequent purchasers.
The material facts of the case, as they apply to the discussion below, are as follows. The previous owners of the working interest (owned now by Sandridge and Forcenergy) entered into a joint operating agreement in September 1982. A subsequent assignment was made, and it was stated in the Assignment that the transfer was subject to the Joint Operating Agreement. In 1984, two of the working interest owners entered into an agreement and assigned of some of their rights, and that assignment did not include a reference to the Joint Operating Agreement. Eventually, the interests were assigned to Forcenergy and TransTexas.
Forcenergy submitted four drilling proposals to TransTexas. However, TransTexas refused to consent to any of them. Forcenergy claimed that it could recover the costs (and penalty) provided for under the non-consent provision of the JOA. TransTexas, and later, Sandridge, argued the joint operating agreement did not apply because TransTexas and Sandridge did not assume the JOA obligations, and those obligations did not “run with the land.” Forcenergy requested the trial court declare that the joint operating agreement applied to Sandridge’s interest, and that Forcenergy owned the title to Sandridge’s working interest, with Sandridge owning the possibility of reverter. The trial court agreed with Forcenergy, and Sandridge appealed the decision to the Texas Court of Appeals.
In the court of appeals, Sandridge argued that neither it nor TransTexas had been a party to the JOA, so Sandridge never assumed the obligations in the JOA. The court disagreed, citing the Texas Supreme Court holding that provides that “every purchaser is bound by ‘every recital, reference, and reservation contained in or fairly disclosed by any instrument which forms an essential link in the chain of title under which he claims.’” Here, not only did TransTexas admit to having constructive notice of the JOA before it ever acquired its working interest, but it had also previously relied upon a provision in the JOA to obtain a temporary restraining order. Therefore, the court dismissed Sandridge’s claim that the JOA’s obligations did not apply to Sandridge because they were not a party to the JOA.
Sandridge also argued that it did not assume the obligations in the 1982 JOA because the parties, in the 1984 transaction, amended the JOA, as evidenced by their conduct and the documents. They based their argument on the fact that neither the assignment nor the letter agreement referred to the JOA. The court again disagreed, noting that Sandridge acquired working interest from a previous party that was not a part of the 1984 transaction.
As for Sandridge’s argument that the JOA did not run with the land, the court examined the JOA to determine whether the parties to it intended to “create a covenant running with the land.” The court pointed to the following language in the JOA which did, in fact, create such a covenant: “[the JOA shall be] binding upon and shall inure to the benefit of the parties hereto and to their respective heirs, devisees, representatives, successors, and assigns.” Because the court held that this language created a covenant that ran with the land, the JOA did apply, and Sandridge was obligated under its provisions, including the non-consent provisions.
Sandridge filed a petition for review with the Texas Supreme Court, claiming that the Court of Appeals erred “in applying a ‘non-consent’ covenant to Sandridge, a non-party.” Sandridge also argues that the Court of Appeals holding “conflicts with Texas law and [Texas Supreme Court] precedent, which limits the transfer of property rights between private parties without the owner’s consent.” Sandridge states, in its petition, that “[p]rivate property rights are a foundational liberty, not a contingent privilege. ‘Our Constitution and laws enshrine land ownership as a keystone right, rather than one ‘relegated to the status of a poor relation.’” Forcenergy responded that “the joint operating agreement was in TransTexas’ chain of title.” Because of this, Forcenergy states, “TransTexas, under the JOA, relinquished its interest in the wells and production therefrom to Forcenergy.”
It will be interesting to watch for the Supreme Court’s disposition of this case. Affirming is leaning toward affecting a fundamental property right, albeit tenuously, in which the mention of a JOA in documents years before a new non-operator’s acquisition of property obligates the new non-operator under the JOA. However, reversing the decision could have the effect of allowing many subsequent purchasers out of obligations that, pursuant to current law, they should be responsible for, not to mention the triggering of an onslaught of new documents that must be signed (and signed again upon sale) in order to ensure that each new buyer is subject to the provisions of all documents affecting the land.