# Storey Minerals, Ltd.

> District Court, S.D. Texas · September 30, 2024

URL: https://www.frixlaw.com/law-library/cases/10678085

## Case

- **Court:** District Court, S.D. Texas
- **Decided:** September 30, 2024
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10678085

## How later opinions describe it (automated extraction)

- 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”
- 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”
- noting that “principles of oil-and-gas law inform our interpretation” of such contracts

## Opinion text

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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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10678085. Public record. Not legal advice.