Storey Minerals, Ltd.

September 30, 2024

Nathan Ochsner, Clerk

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

§ CIVIL ACTION NO

§ 4:21-cv-04148

§

§

IN RE: EP ENERGY E&P § JUDGE CHARLES ESKRIDGE

COMPANY LP, §

Debtor. §

§

§

OPINION AND ORDER

AFFIRMING DECISION OF THE BANKRUPTCY COURT

EP Energy E&P Company, LP is the debtor in the

underlying Chapter 11 bankruptcy proceeding.

Storey Minerals Ltd, Storey Surface Ltd,

Maltsberger/Storey Ranch Lands LLC, the Estate of Sarah

Lee Maltsberger, and Rene R. Barrientos Ltd are creditors

and will be referred to together here as the MSB Owners.

They appeal from an order of the United States

Bankruptcy Court denying state-law and administrative-

expense claims. Dkt 6.

The decision of the Bankruptcy Court is affirmed. See

ROA 5651–97 (memorandum opinion), 5698 (order).

1. Background

EP Energy filed for bankruptcy protection on October

3, 2019. The plan of reorganization was confirmed on

August 27, 2020, and became effective on October 1, 2020.

A bar date for the filing of all administrative-expense

claims was set at October 31, 2020. ROA 0124–25.

This appeal concerns sixteen non-standard oil-and-gas

leases in LaSalle County, Texas. The MSB Owners

collectively leased the minerals to EP Energy’s predecessor

in 2009. Dkts 6 at 15–17 & 14 at 19–21. The parties agree

that the leases are “substantially the same” or “identical

for the purposes of this appeal.” Dkt 6 at 15; see also Dkt 14

at 20.

In May 2020, the market for oil collapsed due to a

significant decrease in demand during the early months of

the COVID-19 pandemic, along with market forces such as

a dispute between Russia and Saudi Arabia. EP Energy

sought to avoid producing oil that sold at a loss or not at

all. It thus ceased production for the entire Eagle-Ford

field, which included wells on land that it leased from the

MSB Owners. Dkt 14 at 21. EP Energy then resumed

production on the wells within forty or fewer days. Id at 22.

The MSB Owners filed what they refer to as a

“threshold motion” with the Bankruptcy Court, seeking

permission to bring state-law claims for trespass against

EP Energy due to this cessation of production. They

attached “an exemplary proposed petition” asserting

trespass claims under state law and later submitted an

amended proposed petition. Dkt 6 at 19; see also

ROA 5465–84. They asserted that cessation had

terminated the leases—meaning in turn, in their view, that

title reverted to them, and EP Energy committed trespass

by continuing to extract minerals from the leased land.

ROA 5478–79 & 5481–82.

Because the confirmation order contained a bar date as

to the filing of administrative-expense claims, the MSB

Owners also filed a separate motion for allowance of

administrative-expense claims pursuant to 11 USC §503.

Dkt 6 at 19–20; see also ROA 0136–40. That motion

included allegations that the lease terminated, EP Energy

owed trespass damages for its continued oil-and-gas

activities on the leases, and those damages constitute

administrative expenses. ROA 0128–130.

The Bankruptcy Court considered the briefing and

heard argument at numerous hearings. But it ultimately

didn’t rule on the threshold motion seeking permission to

file the trespass claims in state court. It instead found that

jurisdiction existed to allow or disallow the administrative-

expense claims. It also found that it had constitutional

authority to assess the validity and value of claims against

the estate because the MSB Owners sought a distribution

from the bankruptcy estate. ROA 5651. The Bankruptcy

Court then concluded that the trespass claims were futile

because EP Energy never terminated the leases, and thus

continued use of the property didn’t constitute a trespass.

In short, the Bankruptcy Court didn’t allow claims

against the estate on the basis asserted by the MSB

Owners. Id at 5652. They timely appealed. Dkt 1.

2. Legal standard

A district court functions as an appellate court when

reviewing the decision of a bankruptcy court as to a core

proceeding, thus applying the same standard of review as

would a federal appellate court. See In re Webb, 954 F2d

1102, 1103–04 (5th Cir 1992). As such, findings of fact are

reviewed for clear error, and conclusions of law are

reviewed de novo. In re Seven Seas Petroleum Inc, 522 F3d

575, 583 (5th Cir 2008); see also Fed R Bankr P 8013.

Matters within the discretion of a bankruptcy court are

reviewed only for abuse of discretion. In re Gandy, 299 F3d

489, 494 (5th Cir 2002).

On review of a bankruptcy court’s conclusions of law,

the district court “may affirm if there are any grounds in

the record to support the judgment, even if those grounds

were not relied upon” by the bankruptcy court. In re Green

Hills Development Co, 741 F3d 651, 656 & n 17 (5th Cir

2014) (citations omitted).

3. Analysis

The MSB Owners raise four issues on appeal:

o First, whether the Bankruptcy Court erred by

finding post-confirmation that it had

jurisdiction and authority to deny the state-law

claims;

o Second, whether the Bankruptcy Court erred

by denying abstention to permit the MSB

Owners to proceed with the state-law claims in

state court;

o Third, whether the Bankruptcy Court’s final

order denying the state-law claims deprived

the MSB Owners of due process; and

o Fourth, whether the Bankruptcy Court erred

by finding that the state-law claims were

“futile” as a matter of law.

Dkt 6 at 14. These are essentially addressed in turn,

although the third argument as to due process is

considered where appropriate with respect to the other

issues.

a. Jurisdiction

The MSB Owners contend that the Bankruptcy Court

lacked jurisdiction because (i) the administrative-expense

claim wasn’t ripe; (ii) the state-law claims weren’t before

the Bankruptcy Court; (iii) the Bankruptcy Court lacked

subject-matter jurisdiction over the state-law claims; (iv)

even if there was jurisdiction, the Bankruptcy Court should

have permissibly abstained; and (v) the Bankruptcy Court

lacked authority to enter a final order. Dkt 6 at 29.

Each of these arguments fails.

i. Was the administrative-expense claim

ripe for review?

Section 501(b)(1)(A) of Title 11 provides that

administrative expenses include “the actual, necessary”

post-petition “costs and expenses of preserving the estate.”

Claims for such expenses are “entitled to priority under the

Bankruptcy Code’s distribution scheme and [are] paid in

full under a Chapter 11 plan unless the claimant agrees to

other treatment.” Ellis v Westinghouse Electric Co, LLC,

11 F4th 221, 227 (3d Cir 2021).

The MSB Owners assert that the administrative-

expense claim—the basis of which is alleged trespass—

wasn’t ripe because their motion for allowance to pursue

such a claim “merely preserved a potential Administrative

Claim that never came to fruition.” Dkt 6 at 30. They say

that review of the administrative-expense claim would only

be available if (i) a state court found EP Energy’s conduct

to be in trespass of the MSB Owners’ rights; (ii) damages

were awarded that were allocable to the pre-effective date

period; and (iii) the MSB Owners pursued those damages

as a claim against the estate. And they argue that none of

these things ever happened. Ibid.

EP Energy responds that the administrative-expense

claim was ripe. It argues that all of the relevant conduct

occurred post-petition and was complete, with the

allowance motion having been timely submitted prior to

the bar date. Dkt 14 at 30–32.

Ripeness is a justiciability doctrine drawn from “Article

III limitations on judicial power and from prudential

reasons for refusing to exercise jurisdiction.” Reno v

Catholic Social Services, Inc, 509 US 43, 57, n 18 (1993).

Its “basic rationale” is “to prevent the courts, through

avoidance of premature adjudication, from entangling

themselves in abstract disagreements.” Abbott

Laboratories v Gardner, 387 US 136, 148 (1967). An issue

becomes ripe when it “would not benefit from any further

factual development and when the court would be in no

better position to adjudicate the issues in the future than

it is now.” Pearson v Holder, 624 F3d 682, 684 (5th Cir

2010) (citation omitted). If the remaining questions are

purely legal, the issues are fit for judicial decision. Cochran

v US Securities and Exchange Commission, 20 F4th 194,

212 (5th Cir 2021).

Of note, the MSB Owners are the ones who filed a

motion for allowance of administrative-expense claim

pursuant to 11 USC §503. Dkt 6 at 20; see also ROA 0136–

40. Administrative expenses like those requested by the

MSB Owners include “the actual, necessary costs and

expenses of preserving the estate.” 11 USC §503(b)(1)(A).

By definition, costs and expenses of preserving the estate

have already occurred by the time of the effective date of

the plan. See Dkt 14 at 32. And, as noted in the proceedings

of In re Worldcom, Inc, “Logically, an entity who files a

request [for] payment of an administrative expense under

§503(a) must be asserting a right to payment” for

“obligations of the debtor incurred during the pendency of

its bankruptcy.” 401 BR 637, 642–43, n 9 (SDNY 2009)

(emphasis added).

This alone suggests that the issue was ripe. And to a

certainty, all relevant conduct as to the underlying

trespass claims was complete by the time that the MSB

Owners filed their motion. The parties also agreed before

the Bankruptcy Court that the plain language of the leases

resolved the temporary-cessation dispute (though they

disagreed on interpretation of that language). ROA 5676.

Even so, the MSB Owners object now on appeal that

the matter wasn’t yet ripe because factual issues remained,

such as whether the trespass was in good faith and the

amount of damages. Dkts 15 at 7 & 27 at 9. They rely

principally on two cases to support contention that the

administrative-expense claim wasn’t yet fit for decision.

Dkt 6 at 31, citing Reading Co v Brown, 391 US 471 (1968),

and In re Charlesbank Laundry, Inc, 755 F2d 200 (1st Cir

1985). Neither is on point.

As to Reading Co v Brown, the MSB Owners assert

that it holds that a bankruptcy court has no jurisdiction to

decide the merits of state-law claims “in lieu of the state

court as part of [a] purported administrative-expense

determination.” Dkt 6 at 31. For this proposition, they

point solely to a footnote, which states “the merits of

negligence claims have not been adjudicated, and, of

course, we intimate no views upon them.” 391 US at 474

n 2. This infers too much. The footnote simply contains a

statement clarifying the scope of that court’s ruling, which

was only as to whether the negligence claims qualified as

administrative expenses in the first instance. It in no way

determines that a bankruptcy court can’t reach the merits

of a tort claim in the context presented here.

As to In re Charlesbank Laundry, Inc, the MSB Owners

cite it to support the following proposition: “Because

liability and damages have not been determined in a proper

state-court proceeding, the bankruptcy court cannot make

a final determination regarding whether any contingent

amount satisfied section 503.” Dkt 6 at 30–31. But the case

is factually distinct in that it concerned state-court actions

that were already pending and about to be tried when the

Chapter 11 petition was filed. The bankruptcy court elected

in that context to vacate the automatic stay so that the

state actions could proceed. 755 F2d at 201. That decision

to permit the pending state-court actions to proceed doesn’t

establish that the bankruptcy court cannot reach the

merits of an allowance claim, where no state-court action

can be said to pre-exist the bankruptcy proceedings.

In sum, the relevant conduct occurred before the

administrative bar date, and no precedent dictates that the

merits of the trespass claims needed to have been resolved

by a state court first. The administrative-expense claim

was ripe and fit for decision.

ii. Was the administrative-expense claim

before the Bankruptcy Court?

The MSB Owners sought permission in their threshold

motion to file the trespass claims in state court because the

confirmation order and the plan prohibited filing in state

court until the Bankruptcy Court determined that the

dispute didn’t constitute a “Claim.” Dkt 6 at 33; see also

ROA 5905–06. The Bankruptcy Court didn’t expressly rule

on the threshold motion but instead rendered it moot by

ruling on the merits of the trespass claims. ROA 5651–98.

The MSB Owners assert that reaching the merits of the

“proposed” state-court petition (which was attached as an

exhibit to the threshold motion) was error. They contend

that the trespass claims “were not before the bankruptcy

court for disposal,” but instead “existed independently of

any Administrative Claim, and they were prevented from

being filed.” Dkt 6 at 32.

It was proper for the Bankruptcy Court to address the

trespass claims as claims for administrative expenses.

Administrative expenses typically benefit the estate, but

the Supreme Court has made clear that “administration

expenses can also be allowed for acts done in the

administration of the estate that do not benefit the estate,

but which harm non-debtors.” In re Theatre Row Phase II

Associates, 385 BR 511, 521 (Bankr SDNY 2008). Tort

claims have been found to be “actual, necessary” costs

ordinarily incident to operation of a business, and thus

administrative expenses under 11 USC §501(b)(1)(A) for

which claims can be brought. For example, in the context

of alleged employment discrimination as presented in Ellis

v Westinghouse Electric Co, LLC, the court explained that,

while the alleged violation of law isn’t a cost of doing

business, a tort claim for employment discrimination is an

administrative expense because the claim arises out of

employment, and employment benefits the estate. 11 F4th

221, 230–31 (3d Cir 2021); see also Reading, 391 US at

483–85 (negligence).

So, too, here. While the alleged trespass isn’t a cost of

doing business, it remains an administrative-expense

claim because it plainly arises out of the leases and uses of

land, which clearly benefit the estate. EP Energy thus

emphasized at hearing that the administrative-expense

claim and the trespass claims are “one and the same.”

Dkt 27 at 45. Indeed, even the administrative-expense

motion by the MSB Owners “incorporated by reference” the

threshold motion, to which the state-court petition was

attached. ROA 0125, 0140.

In sum, it wasn’t improper for the Bankruptcy Court to

decide that the trespass claims were futile. Indeed, it was

the MSB Owners who sought a distribution from the

bankruptcy estate in the first instance. This necessarily

meant that the Bankruptcy Court had to determine if there

was a valid claim against the estate (and if so, the amount).

It wasn’t a context where the Bankruptcy Court could

somehow close its eyes to the underlying merits of the

trespass claim in deciding whether to allow it as an

administrative-expense claim.

This argument by the MSB Owners also touches on

their due-process concern. They contend that the

Bankruptcy Court’s decision to rule on the administrative-

expense claim before the threshold motion “deprived MSB

of its right to have its claims fully heard and litigated,

contrary to due process protections under the Constitution

and the rules of procedure.” Dkt 6 at 34–35. But they cite

no authority indicating that ruling on the merits of the

administrative-expense claim in such way was a violation

of due process. To the contrary, the Bankruptcy Court

properly considered the merits of the trespass claims

through a bankruptcy vehicle—that is, the process afforded

as to claims allowance. It made its determination in that

respect only after briefing and argument. Nothing suggests

that other or further process was due.

No violation of due process occurred in this respect.

iii. Did the Bankruptcy Court have subject-

matter jurisdiction?

Title 28 to the United States Code provides that district

courts “shall have original and exclusive jurisdiction of all

cases under title 11” and “shall have original but not

exclusive jurisdiction of all civil proceedings arising under

title 11, or arising in or related to cases under title 11.”

28 USC §1334(a)–(b); see also In re US Brass Corp, 301 F3d

296, 303 (5th Cir 2002). District courts may then refer to

bankruptcy judges all cases “and any or all proceedings

arising under title 11 or arising in or related to a case under

title 11.” 28 USC §157(a).

Once a matter is referred, the extent to which a

bankruptcy court may adjudicate it depends on whether

the proceeding is considered to be core or non-core. In re

Wilborn, 609 F3d 748, 752 (5th Cir 2010). The Fifth Circuit

has described the difference between core and non-core

matters as follows:

“Core” proceedings are those that “arise

under” Title 11 insofar as they involve a

cause of action created by a statutory

provision therein, and those that “arise in”

cases under Title 11, which by their nature

can only arise in bankruptcy cases; the

district court may refer such core matters

to the bankruptcy court for full

adjudication. . . . For matters that “relate

to” bankruptcy cases, however, the

bankruptcy court may only issue proposed

findings and conclusions to the district

court.

Ibid, citing Matter of Wood, 825 F2d 90, 97 (5th Cir 1987);

In re Southmark Corp, 163 F3d 925, 930, n 8 (5th Cir.1999);

28 USC §157(b).

The MSB Owners argue that the Bankruptcy Court

had neither core (arising under or arising in) jurisdiction

nor non-core (related to) jurisdiction over the trespass

claims. Dkt 6 at 35–40. To the contrary, this

administrative-expense claim is properly characterized as

a core proceeding. The Bankruptcy Court thus didn’t err in

its conclusion that it had jurisdiction. ROA 5659.

Title 28 explicitly provides that core proceedings

“include . . . allowance or disallowance of claims against

the estate.” 28 USC §157(b)(2)(B); see also BVS

Construction, Inc v Prosperity Bank, 18 F4th 169, 173

(5th Cir 2021). And the Fifth Circuit observes that “a

reorganized debtor often must resolve, post-

confirmation . . . administrative claims . . . which fall

within ‘core’ bankruptcy jurisdiction.” Matter of

Chesapeake Energy Corp, 7 F4th 273, 281 (5th Cir 2023).

Despite the explicit statutory language characterizing

administrative-expense claims as core, the MSB Owners

contend that this action is not a core proceeding because

the trespass claims are state-law-based and independent of

the bankruptcy. Dkt 6 at 36–37. But the Fifth Circuit is

clear that a bankruptcy court can reach underlying merits

of state-law claims when determining the allowance or

disallowance of claims against the estate. For example, in

In re Moore, a creditor filed a proof of claim for debts owed

by the debtor. At issue were underlying state-law theories

of fraudulent conveyance, constructive trust, and reverse

veil piercing. The Fifth Circuit explained that “the state-

law basis of the claims is not dispositive” because “the

Bankruptcy Code governed the avoidance action” and

“resolving the state-law claims is necessary to adjudicating

its proof of claim.” 739 F3d 724, 728 (5th Cir 2014). Because

the state-law claims “would necessarily be resolved in the

claims allowance process,” the Fifth Circuit found “the

bankruptcy court had authority to enter final judgment” on

the merits. Id at 726, 728, quoting Stern v Marshall,

564 US 462, 499 (2011).

So, too, here. The merits of the trespass claims “would

necessarily be resolved in the claims allowance process.”

Ibid. By filing an administrative-expense claim, the MSB

Owners sought part of the bankruptcy estate, and in order

to determine whether the MSB Owners were entitled to

any such part, the Bankruptcy Court had to resolve the

substantive question of trespass. And for their part, the

MSB Owners are unable to point to any authority contrary

to that cited above which would prohibit a bankruptcy

court from denying an administrative-expense claim

against the bankruptcy estate on the basis that the claim

is futile under state law. See also In re Southmark Corp,

163 F3d 925 (5th Cir 1999) (recognizing “that many truly

bankruptcy issues, like the determination of the basis for

creditors’ claims, turn on state law,” and fact that

“claims . . . arose under state law does not prevent them

from involving core jurisdiction”).

The Bankruptcy Court reached the merits of the

trespass claims pursuant to the claims-allowance process,

which is a core proceeding under the Bankruptcy Code.

Subject-matter jurisdiction thus existed. Arguments by the

MSB Owners as to related to jurisdiction thus needn’t be

addressed because it is determined that the Bankruptcy

Court properly exercised arising under jurisdiction. See

Dkt 6 at 37–41; see also Dkt 24 (advisory regarding Matter

of Chesapeake Energy Corp, 70 F4th 273 (5th Cir 2023),

arguing that Chesapeake mandates application of post-

confirmation related to standard and bars jurisdiction

here).

iv. Should the Bankruptcy Court have

abstained?

Bankruptcy courts are by statute directed to abstain in

certain circumstances even where subject-matter

jurisdiction exists. The MSB Owners argue that the

Bankruptcy Court erred in not so abstaining from reaching

the merits of the state-law trespass claims. Dkt 6 at 41.

Section 1334(c)(2) of Title 28 addresses mandatory

abstention. The Fifth Circuit has interpreted §133(c)(2) to

mandate that federal courts abstain from hearing a state-

law claim when:

(1) The claim has no independent basis for

federal jurisdiction, other than bankruptcy

jurisdiction;

(2) The claim is a non-core proceeding;

(3) An action has been commenced in state

court; and

(4) The action could be adjudicated timely

in state court.

In re Moore, 739 at 728–29. This requires an affirmative

finding as to all four factors. And quite plainly, no action

had been commenced in state court. See Dkts 6 at 42 & 14

at 36–37. Likewise, it’s determined elsewhere above that

this matter is a core proceeding. The Bankruptcy Court

thus didn’t abuse its discretion in declining to find

mandatory abstention to apply.

Section 1334(c)(1) pertains to permissive abstention.

Whether to abstain in such context requires consideration

of fourteen non-exclusive factors:

(1) Effect or lack thereof on the efficient

administration of the estate if the court

recommends [remand or] abstention;

(2) Extent to which state-law issues

predominate over bankruptcy issues;

(3) Difficult or unsettled nature of

applicable law;

(4) Presence of related proceeding

commenced in state court or other non-

bankruptcy proceeding;

(5) Jurisdictional basis, if any, other than

bankruptcy jurisdiction;

(6) Degree of relatedness or remoteness of

proceeding to main bankruptcy case;

(7) The substance rather than the form of

an asserted core proceeding;

(8) The feasibility of severing state-law

claims from core bankruptcy matters to

allow judgment to be entered in state court

with enforcement left to the bankruptcy

court;

(9) The burden of the bankruptcy court's

docket;

(10) The likelihood that the commence-

ment of the proceeding in bankruptcy court

involves forum shopping by one of the

parties;

(11) The existence of a right to a jury trial;

(12) The presence in the proceeding of non-

debtor parties;

(13) Comity; and

(14) Possibility of prejudice to other parties

in the action.

Special Value Continuation Partners, LP v Jones, 2011 WL

5593058, *7–8 (Bankr SD Tex). The Fifth Circuit observes

that bankruptcy courts “have broad discretion to abstain

from hearing state law claims whenever appropriate ‘in the

interest of justice, or in the interest of comity with State

courts or respect for State law.” Matter of Gober, 100 F3d

1195, 1206 (5th Cir 1996).

The MSB Owners assert that all but the fourth factor

weigh in favor of abstention. Dkt 6 at 44. Not so.

Quite critically, as to the first, the disposition of the

administrative-expense claim naturally affects the

bankruptcy estate. And as to the sixth, the claims-

allowance process is a core proceeding, and the merits of

the claim will necessarily be decided in that process, which

finding implicates several other factors. For example, as to

the seventh, the proceeding is core both in substance and

form. As to the eighth, it isn’t feasible to separate the state-

law merits from the core claims-allowance proceeding. And

as to the second, while it’s true that the merits issue

involves Texas law, the Bankruptcy Court was correct to

note that it is at base a legal question that must be resolved

in assessing the validity of the claim.

And further, as to the tenth, nothing in the record

suggests forum shopping. Indeed, it was the MSB Owners

themselves who initiated a claim in the Bankruptcy Court.

ROA 5674. Relatedly, as to the thirteenth, comity with state

courts isn’t at issue because the trespass claims are solely

before the Bankruptcy Court. As to the ninth, while the

Southern District of Texas is one of the busier bankruptcy

courts, nothing in the record indicates that handling this

matter would be (or was) overly burdensome. And as to the

fourteenth factor, other than the MSB Owners themselves,

there are no other parties in this action who could possibly

be prejudiced by the Bankruptcy Court deciding this

matter.

The MSB Owners are certainly correct that several of

the factors could support abstention. But the first, second,

fourth, sixth, seventh, eighth, ninth, tenth, thirteenth, and

fourteenth factors all weigh against abstention—several

heavily so. The Bankruptcy Court thus didn’t abuse its

discretion in declining to permissively abstain.

v. Did the Bankruptcy Court have

authority to issue a final order?

The MSB Owners also contend, “Because the State-

Law Claims are non-core, the bankruptcy court should

have issued a report and recommendation to the district

court after concluding that the State-Law Claims were

denied. Having failed to do so, the bankruptcy court

deprived MSB of yet another important procedural due

process protection.” Dkt 6 at 47.

It is already determined above that the administrative-

expense claim is explicitly a core proceeding. The

Bankruptcy Court thus had jurisdiction to enter a final

order. 28 USC §157(b)(1). No violation of due process

occurred in this regard.

b. Merits of the trespass claims

The MSB Owners alternatively argue that the

Bankruptcy Court erred in determining that their state-

law trespass claims were futile. They contend that, under

the plain language of the leases, the cessation of production

in 2020 terminated the leases, which in turn meant that

they were owed trespass damages for EP Energy’s

continued operations on the leases. Dkt 6 at 47–71.

The threshold issue is whether the leases terminated.

That depends on interpretation of several clauses in the

subject leases.

The leases here contained the following habendum

clause:

Subject to the other provisions and

limitations hereof, this lease shall be for a

term of four (4) years from the effective

date (hereinafter called the “primary

term”), and as long thereafter as oil or gas

is produced from the leased premises or

this lease is maintained in force and effect

under the other terms and provisions

hereof.

ROA 5928 (emphasis original).

A habendum clause in an oil-and-gas lease generally

“defines the duration of the mineral-lease estate” and

“divides a lease’s duration into two parts: a primary term

and a secondary term,” where “the primary term usually

lasts for a fixed period of time stated in the lease, while the

secondary term continues the lease after the primary term

expires for” as long as oil, gas, or another mineral is

produced or the lease is otherwise maintained. Endeavor

Energy Resources, LP v Discovery Operating, Inc,

554 SW3d 586, 597 (Tex 2018).

It’s undisputed that the primary term under the leases

expired in 2013, with the secondary term beginning

thereafter. The parties dispute whether, notwithstanding

the cessation in production in 2020, EP Energy

“maintained the lease in force and effect under the terms

and provisions” of the leases under this clause.

The Bankruptcy Court determined that EP Energy

maintained the leases under two provisions, being that

(i) under the continuous-development provision, EP Energy

maintained seven leases by continuing to drill new wells,

and (ii) under the temporary-cessation clause, EP Energy

maintained nine other leases by restoring production

within 120 days. ROA 5652. On appeal, the MSB Owners

contend that neither of these maintained the leases,

meaning that the Bankruptcy Court erred as a matter of

law.

i. Continuous-development provision

Generally, a continuous-development provision allows

oil-and-gas leases “to be preserved under certain

circumstances even though there is no production after the

expiration of the primary term during continuous drilling

operations, whether on the same or different wells.”

Endeavor Energy, 554 SW3d at 597, quoting 8 Howard R.

Williams & Charles J. Meyers, Oil and Gas Law: Manual

of Oil and Gas Terms 951 (LexisNexis Matthew Bender

2017) (emphasis original). Such a provision “extends the

entire lease so long as the operator remains engaged in the

required development efforts.” Id at 598.

The continuous-development provision here follows

that general approach:

If this lease has not otherwise terminated

as herein elsewhere provided, then within

[120] days after the latter of either the

expiration of the primary term (if oil or gas

are being produced in paying quantities

from the leased premises at the expiration

of the primary term) or the completion of

any well drilled or reworked by lessee on

the leased premises within [180] days prior

to the expiration of the primary term,

lessee shall have the right to commence the

drilling of an additional well on the leased

premises . . . . Likewise, if this lease has not

otherwise terminated as herein elsewhere

provided, then within [120] days after

completion of such additional well as a

producer of oil or gas or the abandonment

of the same as a dry hole, lessee shall have

the right to commence the drilling of yet

another well on the leased premises . . .

[T]he commencement and drilling of

successive wells may be continued by lessee

until lessee has completed a sufficient

number of wells to continue this lease in

force as to all leased premises as provided

in Paragraph IX below, or until lessee

elects to cease drilling additional wells

thereon.

ROA 5952–53.

The Bankruptcy Court held that this provision allowed

continuous-development operations to hold the entirety of

each lease in force so long as EP Energy complied with its

drilling obligations. ROA 5676.

The MSB Owners don’t actually dispute that EP

Energy complied with its drilling obligations under the

continuous-development provision. See Dkts 6 at 66 & 14

at 63. Instead, they argue that EP Energy’s compliance in

this regard couldn’t maintain the leases because,

immediately after expiration of the primary term, a

separate-lease clause cut short any leases where production

ceased. Dkt 6 at 53–56. The Bankruptcy Court didn’t err in

rejecting this argument.

Generally, a separate-lease clause (also referred to as

a retained-acreage provision) “divides the leased acreage

such that production or development will preserve the

lease only as to a specified portion of the leased acreage.”

Endeavor Energy, 554 SW3d at 597–98, 606. Such clauses

generally take effect after both the primary term and

“continuous drilling or other savings provisions reach their

end.” Mayo Foundation for Medical Education v Courson

Oil & Gas, Inc, 505 SW3d 68, 70 (Tex App—Amarillo 2016,

pet denied).

The separate-lease clause here follows that general

approach and provides:

After the occurrence of any event described

in subparagraph (a) of this Paragraph XI,

production from or operations conducted on

each production unit shall maintain this

lease in force as to, but only as to, that

portion of the leased premises included

within such production unit, and

production from or operations on one unit

will not maintain this lease as to any other

production unit.

ROA 5956–57. Subparagraph (a), also referred to as a

termination clause, in turn provides that:

If this lease has not otherwise terminated

as herein elsewhere provided, then upon

the expiration of the primary term or upon

the cessation of continuous drilling

operations conducted in accordance with

Paragraph VIII [viz, the continuous-

development provision] hereof, whichever

occurs later, this lease shall then terminate

as to all lands covered hereby except land

within a production unit or units at that

time. In addition, this lease shall then

terminate with respect to [the deep rights]

below . . . each such production unit at the

time of such termination.

ROA 5955–56.

Thus, quite obviously, the leases generally terminate of

their own accord at the later of the expiration of the

primary term or the cessation of continuous drilling

operations.

The MSB Owners agree with this natural reading of

the termination clause on its own. But they argue that

reference to the termination clause in the separate-lease

clause is more limited. They contend that because the

separate-lease clause is triggered by “any event described

in subparagraph (a)” (meaning the termination clause

itself), the separate-lease clause is triggered immediately

upon either the expiration of either the primary term or

cessation of compliance with the continuous-development

clause, regardless which occurs later. Dkt 6 at 53–54. In

their view, the phrase “whichever occurs later” in the

termination clause is then immaterial in triggering the

separate-lease clause. And since the primary term

indisputably ended in 2013, the MSB Owners argue that

the separate-lease clause was immediately triggered,

meaning that the continuous-development clause could no

longer serve to continue each lease in force as to all leased

premises—only as to the leases where production occurred

would be maintained. When production stopped, all those

leases terminated.

This is incorrect. The Fifth Circuit admonishes that

courts should “consider the entire writing in an effort to

harmonize and give effect to all the provisions of the

contract so that none will be rendered meaningless.” Kern v

Sitel Corp, 517 F3d 306, 309 (5th Cir 2008), quoting Coker v

Coker, 560 SW2d 391, 393 (Tex 1983) (emphasis original).

“No single provision taken alone will be given controlling

effect; rather, all the provisions must be considered with

reference to the whole instrument.” Ibid; see also Antonin

Scalia and Bryan A. Garner, Reading Law: The

Interpretation of Legal Texts §§24, 27 (West 2012)

(instructing that “text must be construed as a whole” and

“provisions of a text should be interpreted in a way that

renders them compatible, not contradictory”).

The interpretation sought by the MSB Owners would

ignore this instruction, with consequent effect of reading

the modifier “whichever occurs later” out of the lease. The

Bankruptcy Court instead properly harmonized all parts of

the lease in its understanding that “any event” means “any

termination event” under subparagraph (a). See ROA

5676–79. No other interpretation gives effect to the

“whichever occurs later” language in the termination

clause. To the contrary, as just noted, the interpretation

offered by the MSB Owners would instead render that

phrase meaningless. And the MSB Owners provide no

persuasive reason in accord with all principles of proper

interpretation suggesting that the “whichever occurs later”

requirement in the termination clause should not be

included in the reference to that clause in the separate-

lease clause.

As noted by the Bankruptcy Court, the interpretation

sought by the MSB Owners would also have the consequent

effect of reading the continuous-development clause itself

out of the lease. See ROA 5677. Under their reading, the

separate-lease clause would come into effect at the end of

the primary term, thus terminating leases without

production, regardless of whether continuous development

is occurring. This would render meaningless the

unambiguous right of EP Energy under the continuous-

development provision to maintain the “leased premises”—

that is, the entire lease—“after expiration of the primary

term.” See ROA 5678. The Bankruptcy Court instead

properly harmonized all parts of the lease in its

understanding that the separate-lease clause only takes

effect upon the later of the primary term ending or the

cessation of continuous-drilling operations.

Applying that interpretation of the leases to the facts

here, the primary term had obviously ended. So,

termination under subparagraph (a) would occur only upon

the later event, being the cessation of continuous-drilling

operations. That hadn’t occurred as to seven of the leases,

meaning that no event under subparagraph (a) had

occurred. As such, the separate-lease clause wasn’t

triggered, and the continuous-development clause allowed

EP Energy to maintain the entirety of those seven leases.

This interpretation is consistent with other Texas

courts that have construed similar continuous-

development and separate-lease clauses. Courts have held

that such separate-lease clauses “typically do not take

effect until after the continuous drilling or other savings

provisions reach their end.” Mayo Foundation, 505 SW3d

at 70, 72–73 (holding that production units need not be

designated immediately upon end of primary term and can

instead be designated after end of continuous operations);

see also Community Bank of Raymore v Chesapeake

Exploration, LLC, 416 SW3d 750, 756 (Tex App—El Paso

2013) (rejecting argument that upon expiration of primary

term, lease’s “severance” clause segregated production

units and limited “effect of the continuous-development

clause to the confines of each producing unit so that the

clause operated only within each unit, rather than on a

lease-wide basis”). True, these cases interpreted leases

with differently worded temporary-cessation and separate-

lease clauses. Even so, both cases support the proposition

that, in a typical oil-and-gas lease, the separate-lease

clause doesn’t cut short the continuous-development

clause. And if the parties had wished to deviate from this

typical formula, they would have done so with clarity of

intent reflected in their language.

The Bankruptcy Court thus didn’t err in choosing the

interpretation consistent with the typical practice of oil-

and-gas leases. See Wenske v Ealy, 521 SW3d 791, 797

(Tex 2017) (noting that “principles of oil-and-gas law

inform our interpretation” of such contracts); Endeavor

Energy, 615 SW3d at 148 (courts should “construe

contracts from a utilitarian standpoint bearing in mind the

particular business activity”).

In sum, the effect of the continuous-development

provision is that, if EP Energy drilled a well within 120

days of the expiration of the primary term, then by drilling

another well within 120 days of the first well’s completion

or abandonment, EP Energy could continue to maintain its

right to drill on an entire lease, and so on. EP Energy

elected to exercise its continuous-development rights at the

end of the primary term. Dkt 14 at 52. EP Energy complied

with the drilling schedule, and continuous development

has been ongoing since 2013. The end of the primary term,

then, can’t be the later occurring event under

subparagraph (a) (the termination clause). Instead, only

cessation of continuous drilling operations can have

triggered the separate-lease clause. That cessation hadn’t

occurred. And so, the separate-lease clause wasn’t in effect,

and continuous development maintained the seven leases

in the continuous-development phase in their entirety.

The Bankruptcy Court didn’t err in determining that

the MSB Owners’ claim was futile as to these leases.

ii. Temporary-cessation clause

Generally, a temporary-cessation clause in an oil-and-

gas lease “provides that a lease will remain in force during

the secondary term in the absence of actual production if

the lessee conducts drilling or reworking operations within

a fixed number of days of the original cessation of

production.” BP America Production Co v Red Deer

Resources, LLC, 526 SW3d 389, 394–95 (Tex 2017). It also

typically designates a time during which cessation will not

terminate the lease. 3 Williams & Meyers Oil and Gas Law

§616.2.

The temporary-cessation clause here follows that

general approach and provides:

If production should cease from any

production unit, this lease shall terminate

. . . unless lessee commences drilling or

reworking operations on such unit within

one hundred twenty (120) consecutive days

. . . ; and if production is restored from this

unit, this lease shall remain in effect as to

the lands and depths included therein as

long as oil or gas is produced from such

unit.

Any cessation or absence of drilling or

reworking operations or production on or

from a production unit which continues for

a period of one hundred twenty (120)

consecutive days or more shall be deemed

for all purposes of this lease to be

permanent and not temporary.

ROA 5957–58.

There’s no dispute that EP Energy resumed production

within 120 days of cessation. Dkt 14 at 22; ROA 5690. Even

so, the MSB Owners contend that EP Energy didn’t

maintain the leases because this clause requires EP

Energy to actually undertake drilling or reworking

operations within 120 days of ceasing production in order

to maintain the lease. “Simply turn[ing] the wells back on”

does not, in the MSB Owners’ view, maintain the leases.

Dkt 6 at 57.

The Bankruptcy Court held that, under the habendum

clause, EP Energy could maintain the leases “so long . . . as

oil or gas [was] produced” or if the lease was “maintained

in force and effect under other terms and provisions.”

ROA 5691–92. It acknowledged that when production

initially ceased, EP Energy was forced to rely on the

temporary-cessation clause to maintain the leases. This, it

noted, required “drilling or reworking operations” within

120 days, and EP Energy didn’t perform any such drilling

or reworking operations within that required timeline. But

it further observed that EP Energy restored production

well within the 120 days and found that this was sufficient

to maintain the lease. “[O]nce production was restored, EP

Energy could go back to relying on the habendum clause’s

continuous-production condition,” that is, the leases were

maintained “as long as oil or gas [was] produced.”

ROA 5691–92. The Bankruptcy Court noted that

construing the leases otherwise would lead to the “odd (and

perhaps unreasonable) result” that “EP Energy would be

forced to expend additional resources [drilling or

reworking], all with capable wells sitting idle. While EP

Energy was unnecessarily drilling or reworking, neither

party would receive the economic benefits of the existing

productive wells.” ROA 5694–95.

The MSB Owners contend that the Bankruptcy Court

misinterpreted the temporary-cessation clause by ignoring

the language “this lease shall terminate.” Dkt 6 at 59. They

argue that such language should be construed as a special

limitation, which actively cuts short the life of a lease

unless the stated conditions occur, regardless of any other

savings provision. See Endeavor Energy, 554 SW3d at 606:

“A special limitation in an oil and gas lease provides that

the lease will automatically terminate upon the happening

of a stipulated event.” In the MSB Owners’ view, once EP

Energy ceased production, this special limitation was in

effect, and EP Energy could no longer rely on the

continuing-production option in the habendum clause to

save the lease.

The Bankruptcy Court didn’t err in declining to

interpret the temporary-cessation clause as a special

limitation and in holding that EP Energy could continue to

rely on the continuing-production option in the habendum

clause. In the first place, the Texas Supreme Court

observes that “we will not find a special limitation unless

the language is so clear, precise, and unequivocal that we

can reasonably give it no other meaning.” Endeavor

Energy, 615 SW3d at 148. At minimum, the lease here is

not “so clear, precise, and unequivocal” that if production

ceases, then the only way to maintain the lease is to

conduct drilling or reworking operations, even if none are

needed. Rather, an “other meaning” is readily apparent—

resuming production also maintains the lease.

Second, while Texas courts have found that the phrase

“this lease shall terminate” is indicative of a special

limitation, such language isn’t dispositive. See Dkt 15

at 22–23, citing PPC Acquisition Co v Delaware Basin

Reservation, LLC, 619 SW3d 338, 350 (Tex App—El Paso

2021, no pet) and Hitzelberger v Samedan Oil Corp, 948

SW3d 497, 506 (Tex App—Waco 1997, writ denied). Indeed,

the Texas Supreme Court has found that a clause

containing that phrase can be ambiguous and declined to

enforce it as a special imitation. See Endeavor Energy,

615 SW3d at 155.

The MSB Owners alternatively argue that the plain

language and structure of the temporary-cessation clause

is contrary to the interpretation of the Bankruptcy Court.

They argue that this phrase—“if production should cease

from any production unit, this lease shall terminate . . .

unless [EP Energy] commences drilling or reworking

operations”—conclusively sets out what EP Energy must

do to prevent termination. They would thus segregate the

remainder of that clause—“; and if production is restored

from such unit, this lease shall remain in effect”—as an

“additional and subsequent” requirement to maintain the

lease. Dkt 6 at 60.

The Bankruptcy Court correctly harmonized both parts

of the temporary-cessation clause. It read the “and if”

provision to “identif[y] the event that will hold the lease in

force—the restoration of production.” ROA 5691. And it

read the word “and” to mean that production may be

restored by drilling and reworking “also, added to, or as

well as” production. ROA 5693, citing Webster’s Concise

Dictionary of the English Language 26 (1998 ed). Texas

courts also observe that, when two clauses are separated

by a semicolon and the word “and,” the application of “basic

grammar rules” indicates that “each clause stands alone.”

In re Great Plains Management Corp, 665 SW3d 717, 725

(Tex App—San Antonio 2022, pet filed). The semicolon

with the word “and” is thus best taken to mean “also,” with

the following clause providing an additional method of

maintaining the lease.

The reading given by the Bankruptcy Court also

harmonizes with the last sentence of the temporary-

cessation clause, which provides:

Any cessation or absence of drilling or

reworking operations or production on or

from a production unit which continues for

a period of one hundred twenty (120)

consecutive days or more shall be deemed

for all purposes of this lease to be

permanent and not temporary.

ROA 5957–58 (emphasis added). This clause clarifies that

cessation must itself continue for more than 120 days and

is only permanent if “reworking operations or production”

don’t begin again within 120 days. Or, looked at from the

other direction, if “reworking operations or production”

begin within 120 days, the cessation is only temporary, and

the lease remains in effect. The leases can be maintained

through either of these means. See BP America Production

Co v Red Deer Resources, LLC, 526 SW3d 389, 396

(Tex 2017) (holding that “party claiming total cessation of

production must prove that . . . there has been a total

cessation of production for a period longer than that

permitted in the lease’s cessation-of-production savings

clause”). This reading best harmonizes all parts of the

temporary-cessation clause and the rest of the lease.

The Fifth Circuit has construed similar “and if

production results” language in this manner. The lease in

Duke v Sun Oil Co stated that the lease would continue for

the primary term, and then:

as long thereafter as oil, gas or other

mineral is produced from said land, or as

long thereafter as Lessee shall conduct

drilling or reworking operations thereon

with no cessation of more than sixty

consecutive days until production results,

and if production results, so long as any

such mineral is produced.

320 F2d 853, 857 (5th Cir 1963) (emphasis added). A

cessation of production occurred, and the Fifth Circuit

construed the clause to mean that the lease would

terminate unless the lessee “commences drilling,

reworking operations, or . . . production results.” Id at 861

(emphasis added). It explained, “This interpretation is

consistent with the primary purpose of the lease, i.e., to

achieve production.” Id. Notably, the “and if” phrase of the

temporary-cessation clause in Duke followed a comma

instead of a semicolon. But if anything, that would only

serve to amplify the same construction.

Likewise, in Skelly Oil v Harris, the Texas Supreme

Court held that a clause providing that the lease “shall not

terminate if the Lessee commences additional drilling or

reworking” could be kept in force by production. 352 SW2d

950, 950 (Tex 1962). And in Mayers v Sanchez-O'Brien

Minerals Corp, a Texas appellate court similarly held that

a temporary-cessation clause providing that “if after

discovery and production of oil, gas or other mineral, the

production thereof should cease, this lease shall not

terminate if Lessee commences operations for drilling or

reworking” could be kept in force by production. 670 SW2d

704, 708–09 (Tex App—San Antonio 1984, writ refused).

True, the Skelly and Myers clauses were both phrased as

“this lease shall not terminate if” rather than the phrasing

here that “this lease shall terminate unless,” and they

involved savings clauses other than a temporary-cessation

clause. See Dkt 15 at 26. But they still support the general

proposition that the “drilling or reworking” requirement in

a savings clause doesn’t preclude maintaining the lease by

production.

As summarized in a respected treatise on the topic, to

maintain a lease under a temporary-cessation clause, what

matters is that “actual production from the well or else . . .

reworking or drilling operations” begin within the time

period. 1 Ernest Smith and Jacqueline Weaver, Texas Law

of Oil and Gas §4.5[B] (2d ed). The Bankruptcy Court thus

didn’t err when it interpreted “; and if production is

restored from this unit, this lease shall remain in effect,” to

be an additional way in which the lease could be

maintained.

The MSB Owners further argue that the Bankruptcy

Court’s reading of the temporary-cessation clause renders

the shut-in and force majeure clauses of the leases

meaningless. Dkt 31, citing MIECO, LLC v Pioneer

Natural Resources USA, Inc, 2024 WL 3418718, *5

(5th Cir). Not so.

As an initial matter, the citation to MIECO is wholly

inapposite. It involved breach of a natural-gas sales

agreement rather than an oil-and-gas lease. MIECO,

2024 WL 3418718 at *1. As it relates to this case, MIECO

simply stands for the general proposition that courts

shouldn’t interpret a contract in a way that renders any

provision meaningless or superfluous. Id at *5. But the

Bankruptcy Court’s determination here didn’t do so.

Beyond this, the provision as to shut-in royalty is easily

harmonized with the temporary-cessation clause. It

provides:

If there shall be a well on the leased

premises capable of producing gas, but

from which gas is not sold or used off the

leased premises . . . lessee may pay or

tender to lessor, as shut-in royalty, a yearly

sum equal to [$100] per acre times the

number of acres of the leased premises

included within the production unit for

such well. The first such payment of shut-

in royalty shall be made on or before ninety

(90) days after the date on which (i) such

well was shut-in, or (ii) this lease ceases to

be otherwise maintained as to the unit on

which such well is located under other

provisions hereof, whichever is later . . .

and if such shut-in royalty shall be paid or

tendered as above provided, this lease

shall, subject to the other terms and

provisions hereof, remain in force and

effect as to the production unit for which

such payment is made, for a period of one

(1) year from the date of such payment, and

while such lease is thus continued in force,

it shall be considered for all purposes under

this lease that such well is producing gas

from such unit . . . .

ROA 5962. The MSB Owners argue that, under the

Bankruptcy Court’s reading, EP Energy “would have no

need to restrict shut-in wells to gas wells or to tender shut-

in payments as required by the Shut-in clause.” Dkt 31

at 2. But, even under the Bankruptcy Court’s reading, the

distinct shut-in and the temporary-cessation clauses have

different purposes that work harmoniously to fulfill the

purpose of the lease—production in paying quantities.

A temporary-cessation clause will automatically

terminate a lease if production has ceased for longer than

the period permitted in the lease. See Red Deer, 526 SW3d

at 395–96. But the lease can still be sustained if another

savings clause applies, including a shut-in royalty clause.

Id at 396. Generally, a shut-in royalty clause allows the

lessee to “bring about constructive or contractual

production” and thus sustain the lease when there is not

actual production. EnerQuest Oil & Gas, LLC v Plains

Exploration & Production Co, 981 F Supp 2d 575, 586 (WD

Tex 2013), citing Gulf Oil Corp v Reid, 337 SW2d 267

(1960).

Here, under the Bankruptcy Court’s interpretation, EP

Energy could sustain the lease under the temporary-

cessation clause if it resumed production within 120 days

of a cessation. The shut-in royalty clause would be one way

“production” could be restored, thus sustaining the lease.

Under the Bankruptcy Court’s interpretation, then, the

shut-in royalty clause isn’t a superfluous provision but is

instead one that works in tandem with the temporary-

cessation clause. See 3 Williams and Meyers Oil and Gas

Law §616.4 (noting Texas cases holding that lease may be

preserved by payment of shut-in royalty within period of

time authorized by cessation-of-production clause for

resumption of operations).

In actuality, it is the MSB Owners’ interpretation of

the lease that would not, in fact, harmonize the shut-in

royalty and temporary-cessation clauses and would lead to

unreasonable results. If the temporary-cessation clause

served to maintain the lease only by drilling or reworking

(and not resuming production), no provision would exist in

the lease to allow for short-term cessation of production.

This would mean that, for a cessation of even one second,

EP Energy would either have to pay shut-in royalties or

conduct expensive drilling and reworking operations. That

result isn’t reasonable or consistent with the text of the

temporary-cessation clause, which (as previously

determined) specifically provides that the lease can be

sustained by restoring production within 120 days. And

indeed, in an oil-and-gas lease, “the doctrine of temporary

cessation of production is a practical necessity, because oil

and gas are never produced and marketed in a continuous,

uninterrupted operation that goes on every hour of the day

and night.” 2 Eugene O. Kuntz, A Treatise on the Law of

Oil & Gas at 417. Both a shut-in royalty clause and a

temporary-cessation clause as interpreted by the

Bankruptcy Court are crucial parts of operation of the

lease.

The force majeure clause is likewise readily

harmonized with the Bankruptcy Court’s reading of the

temporary-cessation clause. It provides:

If, while this lease is in force, lessee’s

operations are delayed or interrupted by

reason of [force majeure acts or events], and

which acts or events delay or cause the

cessation of operations and are not the

result, in whole or in part, of errors or

omissions on the part of Lessee which

result in such delay, then this lease shall

be extended until such delaying cause or

causes has terminated. Provided, however,

such delay shall in no event extend or

provide an excuse hereunder for a period

longer than one hundred (120) [sic]

days. Lessee shall promptly, and within

fifteen (15) days of the commencement of

such circumstances or cause of delay as

provided herein, notify lessor of the

occurrence of any act of force majeure, the

nature of the act and also promptly notify

lessor of its termination.

ROA 5978–79.

The MSB Owners argue that, under the Bankruptcy

Court’s reading of the temporary-cessation clause, EP

Energy would not “need to claim a force majeure event or

send notice as required by the Force Majeure cause”

because it could simply voluntarily cease production and

resume it again within 120 days under the temporary-

cessation clause. Dkt 31 at 2. But the force majeure clause

covers an entirely different circumstance than the

temporary-cessation clause—that being, a cessation of

operations that is not attributable to action or conduct by

EP Energy. Given that EP Energy doesn’t dispute that it

voluntarily ceased production, the force majeure clause

simply isn’t applicable. And it cannot be said that the

Bankruptcy Court’s interpretation leaves the force majeure

clause entirely without purpose or effect. For example, if a

force majeure occurred while EP Energy had ceased

production, the obligation to commence operations or

restore production would, with proper notice given by EP

Energy, be tolled for up to 120 days under the force majeure

clause. See Dkt 34 at 2–3. Again, as with the shut-in

royalty clause, the force majeure clause works in tandem

with the temporary-cessation clause.

The MSB Owners also take issue with the Bankruptcy

Court’s use of hypotheticals and determination that the

MSB Owners’ position, if accepted, would “result in

unreasonable real-world consequences.” Dkt 6 at 48, 50–52

citing ROA 5677. It isn’t clear why this should be seen as

problematic. Quite to the contrary, it’s typical of

construction of contracts in many contexts. It’s also in

accord with dictates from the Texas Supreme Court, which

has admonished that courts should “construe contracts

from a utilitarian standpoint bearing in mind the

particular business activity sought to be served.” Endeavor

Energy, 615 SW3d at 153.

As such, real-world consequences are appropriately

considered when interpreting an oil-and-gas lease. And

this pairs with further observation by the Texas Supreme

Court that the purpose of an oil-and-gas lease “is to have

the oil and gas on the leased premises produced and

marketed so that [the lessor] may receive his royalty

therefrom, and . . . to discover and produce oil and gas in

such quantities as will yield [the lessee] profit.” Garcia v

King, 164 SW2d 509, 511 (Tex 1942). These purposes are

“material elements to be considered in the interpretation

of the contract.” Ibid.

As already noted, allowing temporary cessation of

production is a practical necessity, given that interruption

in oil-and-gas operations occur frequently. Kuntz, A

Treatise on the Law of Oil & Gas at 417. Such interruptions

have long been recognized as a prevalent phenomenon in

scholarly work in this area:

The production required to keep an oil and

gas lease in effect during the secondary

term obviously cannot be continuous, since

mechanical repairs, reworking operations,

and breakdowns in pumping equipment

can all result in the temporary cessation of

production. Since these occurrences are

incidental to the normal operation of the

lease, the parties must have contemplated

that the temporary cessation of production

would not result in the automatic

termination of the lease. Consequently all

courts adhere to the principle that a

temporary cessation of production will not

terminate the lease.

Daniel L. Berman, Dry Hole, Drilling Operations, and 30

Day–60 Day Drilling Operation Clauses, 38 TEXAS LAW

REVIEW 270, 281 (1960).

Given that incidental disruptions in production are

known to occur at times over the life of an oil-and-gas lease,

it’s quite unreasonable for the MSB Owners to suggest that

the parties expected EP Energy to conduct expensive

drilling and reworking operations in all instances. From

the “utilitarian standpoint” required by Endeavor Energy,

the MSB Owners’ interpretation thus doesn’t serve the

business activity at hand, being the production of oil and

gas in paying quantities. Such interpretation would

instead create inefficiency and engender unnecessary

costs.

The MSB Owners also argue that the Bankruptcy

Court’s interpretation of the leases as allowing a

temporary cessation of production allowed EP Energy to

cease production merely upon finding of “good faith.” As a

result, they argue the Bankruptcy Court violated their due-

process rights by determining without evidence that EP

Energy ceased production in good faith. Dkt 6 at 52. No

cases are cited to support this argument. Regardless, the

Bankruptcy Court didn’t rely on a finding of “good faith” by

EP Energy in its determination that the leases weren’t

terminated. It simply stated that the leases were

maintained by EP Energy’s undisputed compliance with

material terms of the lease, following its interpretation of

those terms. No violation of due process occurred in this

respect.

The Bankruptcy Court thus didn’t err in its

determination, in line with an appropriate synthesis of all

of the text, that the parties rationally contemplated that

the lease could be maintained through short-term

cessations of production simply by resuming production.

And this in turn means that it didn’t err in ruling that the

MSB Owners’ claim was futile as to the leases that were

held by production under the temporary-cessation clause.

4. Conclusion

The Bankruptcy Court had jurisdiction to consider the

merits of the administrative-expense claim. And _ it

correctly interpreted the leases in its determination that

no trespass occurred. Under the plain language, EP Energy

maintained seven leases by complying with drilling

obligations in the continuous development clause and

maintained nine leases by restoring production within 120

days under the temporary-cessation clause. The MSB

Owners’ administrative-expense claim on this basis is

futile.

The memorandum opinion and related order of the

Bankruptcy Court are AFFIRMED. ROA 5651-97, 5698.

SO ORDERED.

Signed on September 30, 2024, at Houston, Texas.

Z.

Hon. Charles Eskridge

United States District Judge

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